   Chapter 12, Problem 12.5.1MBA

Chapter
Section
Textbook Problem

Contributon margin per constraintChavez Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Chavez Chemical is able to sell as much as it can produce of all three. The reaction operation is a bottleneck in the process and is running at 100% of capacity. Chavez Chemical wants to improve chemical operation profitability. The variable conversion cost is \$20 per process hour. The fixed cost is \$550,000. In addition, the cost analyst was able to determine the following information about the three products: The reaction operation is part of the total process for each of these three products. Thus, for example. 1.0 of the 6 hours required to process ethylene is associated with the reactor.InstructionsDetermine the unit contribution margin for each of the three products.

To determine

Concept Introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones.

The formula for contribution margin is as follows:

Contribution margin = Sales - Variable cost.

Similarly contribution margin ratio = Contribution/sales

To Calculate:

The unit Contribution margin for each product

Explanation

The unit Contribution margin for each product is calculated as follows:

 Product Ethylene Butane Ester Selling Price per unit (A) \$ 400 \$ 350 250 Material Cost per unit (B) \$ 180 \$ 130 \$ 90

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