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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 5BPSB
| Product R | Product T | |
| Contribution margin per machine hour | $100 | $35 |
Explanation of Solution
| Product R | Product T | |
| Contribution margin per unit | $40 | $35 |
| Machine hour per unit | 0.4 hour | 1 hour |
| Contribution margin per machine hour | $100 | $35 |
| Maximum number of units to be sold | 550 | 175 |
| Hours required to produce maximum units | 220 | 75 |
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 such product mix.
Answer to Problem 5BPSB
| Product R | Total | |
| Total contribution margin - one shift | $44,000 | $44,000 |
Explanation of Solution
| Product R | Product T | |
| 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 R. |
| Units produced for most profitable sales mix(176/0.4) | 440 | |
| Contribution margin per unit | $100 | |
| Total contribution margin - one shift | $44000 | |
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 such product mix.
Answer to Problem 5BPSB
| Product R | Product T | Total | |
| Total contribution margin - another shift | $55000 | $4620 | $59,620 |
Explanation of Solution
| Product R | Product T | Total | |
| Maximum number of units to be sold | 550 | 175 | 725 |
| Hours required to produce maximum units | 220 | 175 | 395 |
| Hours dedicated to production of each product | 220 | 132 | 352 hours |
| Units produced for most profitable sales mix | 550 | 132 | 712 |
| Contribution margin per unit | $100 | $35 | |
| Total contribution margin - two shift | $55000 | $4620 | $59,620 |
| Total contribution margin - one shift | $44,000 | ||
| Change in contribution margin | $15620 | ||
| Change in fixed cost | $3250 | ||
| Change in operating income | $12370 |
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 R to 675 units.
Answer to Problem 5BPSB
| Product G | Product B | Total | |
| Total contribution margin - two shift with marketing campaign | $67500 | $2870 | $70370 |
Explanation of Solution
| Product G | Product B | Total | |
| Hours dedicated to production of each product | 270 | 82 | 352 |
| Units produced for most profitable sales mix | 675 | 82 | |
| Contribution margin per unit | $100 | $35 | |
| Total contribution margin - two shift with marketing campaign | $67500 | $2870 | $70370 |
| Total contribution margin - two shift without marketing campaign | $55000 | $4620 | $59,620 |
| Change in contribution margin | $10750 | ||
| Additional marketing cost | $4500 | ||
| Change in fixed cost | $3250 | ||
| Change in operating revenue | $3000 |
Since, the change in operating revenue results in profit. Therefore the company should pursue the marketing campaign and increase the production of Product G.
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Chapter 25 Solutions
FUNDAMENTAL ACCT.PRIN.-CONNECT ACCESS
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