Chapter 25, Problem 5APSA

To determine

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

To determine

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

To determine

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.

To determine

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.