Question:
Calculation of contribution margin per unit & machine-hour for MD Widgets.

MD Widgets manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

Model X Model YModel Z
Selling price $80 $90 $100
Direct materials $30 30 30
Direct labor ($10/hour) $15 15 20
Variable support costs $5 10 10
($5 per machine-hour)
Fixed support costs 20 20 20

a)For each model, compute the contribution margin per unit. b)For each model, compute the contribution margin per machine-hour. c)If there is excess capacity, which model is the most profitable to produce? Why? d)If there is a machine breakdown, which model is the most profitable to produce? Why? e)How can MD encourage her sales people to promote the more profitable model?

Solution:
MODEL XMODEL YMODEL Z
Selling price $ 80 $ 90 $ 100 Direct materials $ 30 $ 30 $ 30 Direct labor ($10 per hour) $ 15 $ 15 $ 20 Variable support costs ($5 per machine-hour) $ 5 $ 10 $ 10 Total variable cost $ 50 $ 55 $ 60 Fixed support costs $ 20 $ 20 $ 20

Contribution margin per unit = Selling price per unit - Variable cost per unit $ 30$ 35 $ 40 Contribution margin per machine hour $ 30 $ 18 $ 20

a) The contribution margin per unit for :
Model X = $ 30
Model Y = $ 35
Model Z = $ 40

b) The contribution margin per machine-hour for:
Model X = $ 30
Model Y = $ 35
Model Z = $ 40...

...1. a.) Contributionper CD unit:
Unit Selling Variable Costs
$9.00 1.25 - .35 1.00 = $6.40
$6.40
b.) Break-even volume in CD units and dollars:
($275,000 + 250,000) / 6.40 = 82,032 units
82,032 * $9.00 = $738,288 to break even
c.) Net profit if 1 million CD's sold:
1,000,000 * 6.40 = 6,400,000
6,400,000 525,000 = $5,875,000
d.) Necessary CD unit volume to achieve $200,000 profit
6.40 (x) - $525,000 = 200,000
x = 113,282 units needed
2. a.) Unitcontribution and contributionmargin:
$20 4.00 - .50 - .50 = $15 unitcontribution
$15 / 20 = 75 % contributionmargin
b.) Break-even point in units? In dollars?
$15 (x) 125,000 5,000 10,000 35,000 = 0
11,667 units are needed
11,667 * $20 = $233,340 dollars needed
c.) What share of the market is needed to earn a 20% return on investment?
??????????????????
3.
4. a.) Selling to wholesalers...

...$9.90 perhour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. As rent and other fixed expenses he expends $1,750 every month, plus $ 0.40 as the cost of hair shampoo used on all his clients. This saloon is performing haircuts exclusively and each client paid a flat price of $ 12.00.
He wanted for us to evaluate a new compensation method for his employees. Under the new system the barbers will receive a flat salary of $4 perhour, and a commission of $ 6.00 for each haircut. In this case Andre wants to know how much is going to be the new contributionmarginper haircut, the annual break-even point in number of haircuts.
On our evaluation, Andre requested to find the following information.
1. Find the contributionmarginper haircut.
ContributionMargins Definition
"Contributionmargin (or margins) refers to the amount of revenue per product that is available to "contribute" towards the fixed costs and the profit of the company. Since, for digital products, the variable costs are typically very small, or zero, most of the revenue earned from the sale of a product form the contributionmargin. Assuming the contributionmargin...

...(disregard everything beneath the line titled “income from operations”)? Which expenses shown on page 50 appear to have been reclassified as variable selling costs on page 33?
Absorption is a method where all the costs of production are allocated to the produced units. This method is in contrast to variable (or marginal or direct) costing, which attaches only variable costs to the manufactured output and charges the fixed costs to the accounting period (referenceforbusiness.com, n.d.). The page 50 income statement uses the absorption format. The page 33 income statement is set using a contribution format. The contribution format centers on the idea that each unit sold provides a certain amount of contributionmargin that goes to covering fixed costs.
In 2004 expenses like distribution and transport (29,988) and the sales commissions (73,573) have been reclassified (contribution format) as variable selling costs on page 33 ([104]).
2. Why do you think cost of sales is included in the computation of contributionmargin on page 33?
Benetton’s cost of sales includes some fixed expenses but most of the expenses Benetton incurs are variable. The cost of sales is included in the computation of contributionmargin because the costs that go into creating the products that Benetton sells have a direct...

...Excel Assignment #2
Preparing a ContributionMargin Income Statement and Operating Leverage
Summer 2013
1. Assume that a company is budgeting to sell 2,500 units of a product at a selling price perunit of $32. The variable cost perunit is $26 and total fixed costs are $5,000.
REQUIRED
Prepare a contributionmargin income statement and calculate operating leverage.
2. Suppose the company is unsure exactly how many units they will sell. As such, their marketing department has provided a worst case scenario where sales would be 1,500 units and a best case scenario where sales would be 2,700 units. Assume that the selling price perunit, variable cost perunit and fixed costs will remain constant (per part 1).
REQUIRED
Prepare a contributionmargin income statement and calculate operating leverage for both the worst case scenario (sales of 1,500 units) and the best case scenario (sales of 2,700 units).
3. Suppose the company believes that 2,500 units is the most likely volume of sales. However, it is unsure at what selling price perunit it will be able to charge. The marketing department has provided a high...

...activity where:
A. total revenue equals total cost.
B. variable cost equals fixed cost.
C. total contributionmargin equals the sum of variable cost plus fixed cost.
D. sales revenue equals total variable cost.
E. profit is greater than zero.
3. The unitcontributionmargin is calculated as the difference between:
A. selling price and fixed cost perunit.
B. selling price and variable costperunit.
C. selling price and product cost perunit.
D. fixed cost perunit and variable cost perunit.
E. fixed cost perunit and product cost perunit.
4. Which of the following would produce the largest increase in the contributionmarginperunit?
A. A 7% increase in selling price.
B. A 15% decrease in selling price.
C. A 14% increase in variable cost.
D. A 17% decrease in fixed cost.
E. A 23% increase in the number of units sold.
5. Which of the following would take place if a company were able to reduce its variable cost perunit?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
6. Which of the following would take place if a company experienced an increase in fixed costs?
A. Net income would...

...What is the contributionmargin ratio? |
A) | 43%. |
B) | 30%. |
C) | 70%. |
D) | Cannot be determined because amounts are not expressed perunit. |
6. | Barcelona Bagpipes produces two models: Model 24 has sales of 500 units with a contributionmargin of $40 each; Model 26 has sales of 350 units with a contributionmargin of $50 each. If sales of Model 26 increase by 100 units, how much will profit change? |
A) | $5,000 increase. |
B) | $17,500 increase. |
C) | $22,500 increase. |
D) | $35,000 increase. |
7. | Which of the following would be the least controllable fixed costs? |
A) | Property taxes. |
B) | Rent. |
C) | Research and development. |
D) | Management training programs. |
8. | Which concept answers the following question: “If budgeted revenues are above breakeven and decline, how far can they fall before the break-even point is reached?” |
A) | Contributionmargin. |
B) | Relevant range of operations. |
C) | Target margin. |
D) | Margin of safety. |
9. | Fields Corporation has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Fields incurs $2,220,000 in fixed costs. The contributionmargin ratio for Sporting Goods is...

...that has the following data:
Unit Sales price P80 perunitUnit vairiable costs P48 perunit
Total fixes costs P640,000 per annum
Units sold during the current year P25,000 units
A. Unitcontributionmargin, contributionmargin ratio and variable cost ratio.
B. Breakeven point in units and in pesos.
C. Margin of safety in units and in pesos, and margin of safety ratio.
D. Profit Ratio
E. The amount of profit using the margin of safety
F. If sales increase by P300,000. How much would you expect profit to increase?
SOLUTIONS:
A. UnitsUnit Price Amount Rate
Sales 25,000 80.00 2,000,000 100%
Variable Costs 25,000 48.00 1,200,000 60%
ContributionMargin 25,000 P32.00 800,000 40%
Fixed costs 640,000
Profit before profit tax P160,000
UCM= P32.00 CMR= 40% VCR= 60%
B. BEP(units) = 640,000/32 = 20,000 units
BPR(pesos)= 640/000/40%= P1,600,000
C. Amount Units Rate
Actual Sales P2,000,000 25,000 100%
Break Even sales 1,600,000 20,000 80%
Margin of Safety P400,000 P5,000 20%
D. Profit= P2,000,000 x 8%= P160,000
E. NPR=...

...of $40 perunit and variable expenses of $15 perunit. The company's fixed expenses total $30,000 per year. The company's break-even point in terms of total dollar sales is: A) $100,000. B) $80,000. C) $60,000. D) $48,000. The answer is d. CMR = (P-V)/P = ($40 - $15)/$40 = 62.5% Px = F/ (CMR) Px = $30,000/.625 = $48,000 Use the following to answer questions 2-3: Weiss Corporation produces two models of wood chairs, Colonial and Early American. The Colonial sells for $60 per chair and the Early American sells for $80 per chair. Variable expenses for each model are as follows:
Colonial $35 9 Early American $48 8
Variable production cost perunit ....... Variable selling expense perunit .......
Total fixed expenses are $39,600 per month. Expected monthly sales are: Colonial, 1,800 units; Early American, 600 units. 2. The contributionmarginper chair for the Colonial model is: A) $51. B) $16. C) $35. D) $25. The answer is b. CM = P-V = $60 - $35 - $9 = $16.
Page 1
3. If the sales mix and sales units are as expected, the break-even in sales dollars is closest to: A) $132,000. B) $148,500. C) $143,000. D) $139,764. Price: Variable Costs: ContributionMargin: Contribution...

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