Contribution margin per constraint Zion Metals Inc. has three grades of metal product, A1, B3, and E6. Financial data for the three grades are as follows: A1 B3 E6 Revenue $ 400,000 $ 578,000 $ 300,000 Variable cost $(250,000) $(380,000) $(270,000) Fixed cost (105,000) (118,800) (20,000) Total cost $(355,000) $(498,800) $(290,000) Operating income $ 45,000 $ 79,200 $ 10,000 Number of units ÷ 15,000 ÷ 16,500 ÷ 5,000
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Contribution margin per constraint
Zion Metals Inc. has three grades of metal product, A1, B3, and E6. Financial data for the three grades are as follows:
| A1 | B3 | E6 | |||||
| Revenue | $ 400,000 | $ 578,000 | $ 300,000 | ||||
| Variable cost | $(250,000) | $(380,000) | $(270,000) | ||||
| Fixed cost | (105,000) | (118,800) | (20,000) | ||||
| Total cost | $(355,000) | $(498,800) | $(290,000) | ||||
| Operating income | $ 45,000 | $ 79,200 | $ 10,000 | ||||
| Number of units | ÷ 15,000 | ÷ 16,500 | ÷ 5,000 | ||||
| Operating income per unit | $ 3.00 | $ 4.80 | $ 2.00 |
Zion Metals’ operations require all three grades to be melted in a furnace before being formed. The furnace runs 24 hours a day, 7 days a week, and is a production constraint. The furnace hours required per unit of each product are as follows:
| A1: | 8 hours | ||
| B3: | 10 hours | ||
| E6: | 6 hours |
The Marketing Department is considering a new marketing and sales campaign. Which product should be emphasized in the marketing and sales campaign in order to maximize profitability? ______________
Options
a. Type A1
b. Type B3
c. Type E6
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