Last year, a sailboard company produced two types of boards: a regular board for multi-purpose sailing; and, a special trick board used by experts for competitions. The regular board sells for $750 and the competition board sells for $1,350. The variable production costs are $250 and $400 respectively, and the company has $400,000 in fixed costs overall. Marketing staff have determined that the company should specialize in the competition boards only, and sell the regular boards, if at all, under a different brand name. Last year the company made a profit, selling twice as many regular boards as competition boards, resulting in a fixed cost allocation of $5.00 per board. It takes 6 hours of direct labour to make a regular board and 12 hours to make a competition board. The company worked at full capacity of 19,500 direct labour hours last year.
Based on the above information only, which product or mix of products, should the company choose? Assume that any and all production can be sold.
A) the regular board only, as it takes fewer direct labour hours to build
B) both, as the company made a profit last year using this strategy
C) the competition board only, as it has a higher contribution margin
D) Any combination is equivalent, based on the contribution margin times the number of boards that could be sold.
E) the regular board only, as it has the highest contribution margin per direct labour hour

Question

Quizplus · Accepted Answer

The competition board has a higher selling price but also higher variable costs and takes more labor hours to produce. Calculating the contribution margin per direct labor hour for each board type shows that the regular board provides a higher return on the labor invested.

Last Year, a Sailboard Company Produced Two Types of Boards