Exhibit 7-7
Fishing Products Company produces three types of fishing poles: Light,Medium,and Heavy.The poles are produced in separate departments and sent to the quality testing department before being shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Fishing Products would like to optimize its use of labor hours by producing the two most profitable fishing poles.Information for each pole follows:
$$\begin{array} { l c c c }
& \begin{array} { c }
\text { Quality Testing } \
\text { Labor-hours }
\end{array} & \text { Price } & \text { Variable Cost } \
\text { Light } & 2 & \$ 300 & \$ 170 \
\text { Mediurn } & 3 & 500 & 200 \
\text { Heavy } & 5 & 1,200 & 380
\end{array}$$
-Refer to Exhibit 7-7.What is the contribution margin per unit of constrained resource for the Light product?

Question

Exhibit 7-7
Fishing Products Company produces three types of fishing poles: Light,Medium,and Heavy.The poles are produced in separate departments and sent to the quality testing department before being shipped.A labor-hour bottleneck has been identified in the quality testing department due to the high skill requirements of the job.Fishing Products would like to optimize its use of labor hours by producing the two most profitable fishing poles.Information for each pole follows:
 $$\begin{array} { l c c c } 
& \begin{array} { c } 
\text { Quality Testing } \
\text { Labor-hours }
\end{array} & \text { Price } & \text { Variable Cost } \
 \text { Light } & 2 & \$ 300 & \$ 170 \
\text { Mediurn } & 3 & 500 & 200 \
\text { Heavy } & 5 & 1,200 & 380
\end{array}$$
-Refer to Exhibit 7-7.What is the contribution margin per unit of constrained resource for the Light product?

Quizplus · Accepted Answer

To calculate the contribution margin per unit of constrained resource, we need to divide the contribution margin per unit by the number of labor hours required per unit in the quality testing department (which is the bottleneck).

For the Light product: 
Contribution margin per unit = $250 - $140 - $45 - $0 = $65 
Number of labor hours required per unit = 0.5

Contribution margin per unit of constrained resource = $65 / 0.5 = $130

Therefore, the contribution margin per unit of constrained resource for the Light product is $130.

Based on this information, we can use the following approach to determine the best product mix: 
1. Calculate the contribution margin per unit of constrained resource for each product. 
2. Rank the products based on their contribution margin per unit of constrained resource, from highest to lowest. 
3. Produce the products in order of rank until the available labor hours in the quality testing department are fully utilized.

Exhibit 7-7 Fishing Products Company Produces Three Types of Fishing

Exhibit 7-7
Fishing Products Company Produces Three Types of Fishing