Reference no: EM131601096

Problem - High Prairie Industries produces three products, A, B, & C. The selling price, variable costs, and contribution margin for one unit of each product follow:

                                                                                  Product

                                                                 X                     Y                    Z

Selling price                                               $120               $180               $160

Variable costs:

Direct materials                                          54                   28                   80

Direct labor                                                24                   64                   32

Variable manufacturing overhead                  6                   16                   8

Total variable costs                                     84                  108                120

Contribution margin                                    $36                $72                 $40

Contribution margin ratio                            30%                40%                25%

Due to a strike in the plant of one of its competitors, demand for the company's products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate on next week in filling its backlog of orders. The direct labor rate is $16 per hour, and only 3,000 hours of labor time are available each week.

Which orders would you recommend that the company work on next week - the order for Product X, Product Y, or Product Z? Show computations.

By paying overtime wages, more than 3,000 hours of direct labor time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? Explain.