North Star Guns is a high technology enterprise making sophisticated products for the armaments market. One of the two profit centers, North Star Engineering, manufactures two types of electronic guidance units: “Standard” and “Deluxe.” These units require a high degree of skill in manufacturing. However, because of a shortage of trained engineers, North Star Engineering has only 100 skilled employees, whose total labor capacity (allowing for sickness, leaves, and so on) is expected to be 100,000 hours per year. The data for North Star Engineering follow.
|
Standard |
Deluxe |
|
|
Materials (parts) |
$1,000 |
$4,000 |
|
Labor |
10 hours 0 $20 |
100 hours 0 $20 |
|
Variable overhead per labor hour |
$10 |
$10 |
|
Market price |
$1,500 |
$10,000 |
|
Fixed overhead |
$1,000,000 |
Standard has a potentially unlimited market, but Deluxe has only the Army as a customer.
North Star Engineering has a standing order for 500 Deluxe units per year from the Army.
1. What is the total amount of labor hours used now for each product?
2. Which product should be produced in order to maximize total contribution margin of North Star Engineering?
(SMA, adapted)