The Wester Corporation produces three products with the following costs and selling prices: The company has insufficient capacity to fulfill all of the demand for these three products.If direct labor hours are the constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:
A) A, B, C
B) B, A, C
C) C, A, B
D) A, C, B

Question

The Wester Corporation produces three products with the following costs and selling prices:  The company has insufficient capacity to fulfill all of the demand for these three products.If direct labor hours are the constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:
A) A, B, C 
B) B, A, C 
C) C, A, B 
D) A, C, B

Quizplus · Accepted Answer

To determine which product is the most profitable use of the constrained resource, we need to find the contribution margin per direct labor hour (DLH) for each product. The contribution margin per DLH is calculated as follows:

Product A: ($45 - $30 - $8) / 0.5 = $14
Product B: ($40 - $26 - $7) / 0.4 = $17.50
Product C: ($30 - $18 - $5) / 0.3 = $23.33

Therefore, product C has the highest contribution margin per DLH and is the most profitable use of the constrained resource. Product B is the second most profitable, followed by product A. Therefore, the ranking from most to least profitable is B, A, C, and the best choice is B.

The Wester Corporation Produces Three Products with the Following Costs