What is the problem?
There is an increasing demand for skateboards. Should Sports Express add a new product line for skateboards to capitalize on this growth potential or should they maintain the status quo of producing tackle boxes? What are the Options?
Maintain the status quo of manufacturing 8,000 tackle boxes •
Add a new product line for skateboards
Purchase tackle boxes from Texas Stars
Direct Labor Hours = $18.75/$15.00 per hour = 1.25 hours •
Overhead per DLH = $12.50/1.25 hours = $10.00
Capacity = 8,000 tackle boxes * 1.25 hours = 10,000 hours •
Total Overhead = 10,000 hours * $10 per hour = $100,000
Variable Overhead = $100,000 - $50,000 = $50,000
Variable Overhead per hour = $50,000/10,000 hours = $5.00 per hour •
Variable Overhead per unit = $5.00 per hour * 1.25 hours = $6.25 o
Direct Labor Hours = $7.50/$15.00 per hour = 0.5 hours
Variable Overhead per unit = $5.00 * 0.5 = $2.50
Contribution Margin Per Direct Labor Hour: Analysis of the possible production plans led our group to determine that Sports Express is working with a constrained resource, direct labor hours. At it’s current production capacity of 8,000 tackle boxes, Sports Express will not be able to fill the high demand for tackle boxes or skateboards estimated at 12,000 tackle boxes & 17,500 skateboards. With demand high and direct labor hours in short supply, Sports Express should rank its products based on contribution margin per direct labor hour to determine the right mix in order to maximize profit. Exhibit 1 shows the contribution margin per direct labor hour for each of the proposed product lines.
Utilizing the method of allocating scarce resources, we find that producing skateboards at the proposed volume provides the highest contribution margin per direct labor hour. From Exhibit 1, our calculations conclude that the production of skateboards...
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