ACCA PM · Chapter 6 · Question 9 of 10
Omega Co makes products X and Y. Contribution is $40 per unit of X and $50 per unit of Y. Constraints are: Labour: 2x + 4y <= 4,000 hours Machine: 3x + 2y <= 3,600 hours Demand for X: x <= 1,000 units where x and y are the units of X and Y produced. The shadow price of labour has been calculated as $8.75 per hour. Additional labour hours could be obtained by paying an overtime premium of $10 per hour above the normal rate. What should Omega Co do?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Not buy the extra hours, because the premium exceeds the extra contribution each hour would generate
Explanation
Each additional labour hour increases contribution by the shadow price of $8.75 (before the premium). Paying a premium of $10 would reduce profit by $1.25 per hour, so it is not worthwhile even though labour is binding. Comparing the premium with contribution per unit rather than per hour is a common error.
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