Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 51

Profitability Analysis, Scarce Resources Santana Company has met all production requirements for the current month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices and costs for three models of one of its product lines are as follows:

	No Frills	Standard Options	Super
Selling price	$30	$35	$50
Direct materials	9	11	11
Direct labor ($10/hour)	5	10	15
Variable overhead	3	6	9
Fixed overhead	3	6	6

Variable overhead is charged to products on the basis of direct labor dollars; fixed overhead is charged to products on the basis of machine-hours.

Required

1. If Santana Company has excess machine capacity and can add more labor as needed (neither machine capacity nor labor is a constraint), the excess production capacity should be devoted to producing which product or products?

---

2. If Santana Company has excess machine capacity but a limited amount of labor time, the production capacity should be devoted to producing which product or products?

Step 1 of 3

Fixed costs are costs which does not changes with change in level of production. Variable costs are costs which does changes with change in level of production.