Assume Fender produces only three guitars: the Guitar 1, Guitar 2 and Guitar 3. A limitation of 720 labor hours per week prevents Fender from meeting the sales demand for these products. Product information is as follows:
Guitar 1/Guitar 2/Guitar 3
Unit selling price: $960/$600/$1,260
Unit variable costs: (600)/(300)/(1,080)
Unit contribution margin: $360/$300/$180
Labor hours per unit: 36/24/36
Determine the weekly contribution from each product when total labor hours are allocated to the product with the highest.
1. Unit selling price.
2. Unit contribution margin.
3. Contribution per labor hour.
(Hint: Each situation is independent of the others.)
Finally, determine the opportunity cost the company will incur if management requires the weekly production of 20 Guitar 3's.
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