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Calculation of Contribution Margin Per Unit & Machine-Hour for Md Widgets Essay Sample

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Calculation of Contribution Margin Per Unit & Machine-Hour for Md Widgets Essay Sample

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

c) If there is excess capacity, which model is the most profitable to produce? Why? Model Z is more profitable since its contribution margin is greater than the other two models which will result in excess profit. d) If there is a machine breakdown, which model is the most profitable to produce? Why? Model X is more profitable at times of machine break-down since the machine hour required per unit is 1, whereas for the other two models 2 machine hours are required e) How can MD encourage her sales people to promote the more profitable model? By introducing a sales commission depending on the most profitable model, MD can encourage her sales people to promote and sell the most profitable model

References:

http://classof1.com/homework-help/accounting-homework-help

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