Chapter 25, Problem 5BPSB

To determine

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

To determine

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

To determine

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.

To determine

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.