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Concept Introduction:
Contribution margin
Contribution margin is the difference between sales price of a product and variable cost that results in the incremental profit earned for each unit sold. It means the contribution margin generated to meet the fixed cost and generate profit.
Requirement 1:
We have to determine the contribution margin per machine hour that product generates.
Answer to Problem 5APSA
| Product G | Product B | |
| Contribution margin per machine hour | $200 | $70 |
Explanation of Solution
| Product G | Product B | |
| Contribution margin per unit | $80 | $70 |
| Machine hour per unit | 0.4 hour | 1 hour |
| Contribution margin per machine hour | $200 | $70 |
| Maximum number of units to be sold | 600 | 200 |
| Hours required to produce maximum units | 240 | 200 |
Concept Introduction:
Contribution margin
Contribution margin is the difference between sales price of a product and variable cost that results in the incremental profit earned for each unit sold. It means the contribution margin generated to meet the fixed cost and generate profit.
Requirement 2:
We have to determine the product mix if it operates in only one shift and contribution margin of suh product mix.
Answer to Problem 5APSA
| Product G | Total | |
| Total contribution margin - one shift | $35,200 | $35,200 |
Explanation of Solution
| Product G | Product B | |
| Hours dedicated to production of each product | 176 | Nil as machine hour is limited and we will produce product g as contribution is higher of product G. |
| Units produced for most profitable sales mix(176/0.4) | 440 | |
| Contribution margin per unit | $80 | |
| Total contribution margin - one shift | $35,200 | |
Concept Introduction:
Contribution margin
Contribution margin is the difference between sales price of a product and variable cost that results in the incremental profit earned for each unit sold. It means the contribution margin generated to meet the fixed cost and generate profit.
Requirement 3:
We have to determine the product mix if it operates in two shifts and contribution margin of suh product mix.
Answer to Problem 5APSA
| Product G | Product B | Total | |
| Total contribution margin - another shift | $48000 | $7840 | $55840 |
Explanation of Solution
| Product G | Product B | Total | |
| Maximum number of units to be sold | 600 | 200 | 800 |
| Hours required to produce maximum units | 240 | 200 | 440 |
| Hours dedicated to production of each product | 240 | 112 | 352 hours |
| Units produced for most profitable sales mix | 600 | 112 | 712 |
| Contribution margin per unit | $80 | $70 | |
| Total contribution margin - two shift | $48000 | $7840 | $55840 |
| Total contribution margin - one shift | $35200 | ||
| Change in contribution margin | $20640 | ||
| Change in fixed cost | $15000 | ||
| Change in operating income | $5640 |
Since, it results in increase in operating income. Therefore the company should add another shift.
Concept Introduction:
Contribution margin
Contribution margin is the difference between sales price of a product and variable cost that results in the incremental profit earned for each unit sold. It means the contribution margin generated to meet the fixed cost and generate profit.
Requirement 4:
We have to determine whether it is profitable to increase the maximum production of product G to 700 units.
Answer to Problem 5APSA
| Product G | Product B | Total | |
| Total contribution margin - two shift with marketing campaign | $56000 | $5040 | $61040 |
Explanation of Solution
| Product G | Product B | Total | |
| Hours dedicated to production of each product | 280 | 72 | 352 |
| Units produced for most profitable sales mix | 700 | 72 | |
| Contribution margin per unit | $80 | $70 | |
| Total contribution margin - two shift with marketing campaign | $56000 | $5040 | $61040 |
| Total contribution margin - two shift without marketing campaign | $48000 | $7840 | $55840 |
| Change in contribution margin | $5200 | ||
| Additional marketing cost | $12000 | ||
| Change in fixed cost | $15000 | ||
| Change in operating revenue | ($21800) |
Since, the change in operating revenue results in loss. Therefore the company should not pursue the marketing campaign and increase the production of Product G.
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Chapter 25 Solutions
Fundamental Accounting Principles
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