Reference no: EM132631150
Question - Profitability with resource limitations
Kane ltd manufactures two products. On average, it sells 50,000 units of product A and 70,000 units of product b each year. This year, the company has a restricted advertising budget of $40,000, which is only enough to effectively promote one of its products. The marketing department estimates that average sales of product A will increase by 25 percent if it is advertised, while product B's average sales will increase by 20 percent if it is advertised. The following data is provided.
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Product A
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Product B
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Selling price per unit
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$25
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$35
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Variable cost per unit
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$15
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$19
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Product time per unit (labor hours)
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2 hours
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4 hours
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Kane ltds fixed costs are $800,000.
Required -
a. Calculate the contribution margin for each product.
b. Calculate the contribution margin per labor hour for each product.
c. Assuming unlimited labor hours, which product should be promoted in the advertising campaign?
d. Would you answer to (a) change if there were only 200,000 labor hours available for production?
e. Prepare the income statement after your decision in (c) and (d).
f. discuss the differences in your answers to (c) and (d) above.