Question

1. Archer Industries sells three different sets of sportswear. Sleek sells for $30 and has variable costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $80 and has variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent, 20%. Instructions What is the weighted-average unit contribution margin?

2. sony Inc. sells two product lines. The sales mix of the product lines is: Standard, 60%; and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 35%; and Deluxe, 45%. Lazaro’s fixed costs are $1,950,000.

Instructions

what is the dollar amount of Deluxe sales at the break-even point?

Hunt, Inc. provided the following information concerning two products:

                                                                        Product 12            Product 43

Contribution margin per unit                                 $20                     $18

Machine hours required for one unit                 2 hours             1.5 hours

Instructions

Compute the contribution margin per unit of limited resource for each product. Which product should Hunt tell its sales personnel to “push” to customers?

Answer 1

Answer 1)

Calculation of weighted average contribution margin for Archer Industries

Particulars	Sleek	Smooth	Potent
Selling Price per unit	$ 30	$ 50	$ 80
Variable cost per unit	$ 18	$ 30	$ 45
Contribution margin per unit	$ 12	$ 20	$35
Sales Mix	50%	30%	20%
Contribution margin per unit X Sales Mix	$ 6	$ 6	$ 7

Contribution margin per unit = Selling price per unit – Variable cost per unit

Weighted average Contribution margin = (Contribution margin of Sleek X percentage of Sleek in sales mix) + (Contribution margin of Smooth X percentage of Smooth in sales mix) + (Contribution margin of Potent X percentage of Potent in sales mix)

                                                = ($ 12 X 50%) + ($ 20 X 30%) + ($ 35 X 20%)

                                                = $ 6 + $ 6 + $ 7

                                                = $ 19        

Therefore weighted average contribution margin is $ 19.

Answer 2)

Calculation of Sales of Deluxe Product at Break –even sales

Let the sales value at break-even point is “$ y”

Sales of “Standard” = Total Sales X Sales mix of Standard

Sales of “Standard” = ($ y) X 60%

Sales of “Standard” =$ 0.60y

Sales of “Deluxe” = Total Sales X Sales mix of Deluxe

Sales of “Deluxe” = ($ y) X 40%

Sales of “Deluxe” =$ 0.40y

Overall contribution margin = (Sales of Standard product X Contribution margin ratio of Standard product) + (Sales of Deluxe product X Contribution margin ratio of Deluxe product)

                                                      = ($ 0.60y X 35%) + ($ 0.40y X 45%)

                                                      = $ 0.21y + $ 0.18y

                                                      = $ 0.39y

Therefore overall contribution margin is $ 0.39y

At Break-even Sales level, Overall contribution margin is Equal to Total Fixed Cost

Therefore,

Fixed Cost = Overall Contribution margin

$ 1,950,000 = $ 0.39y

y = $ 5,000,000

Therefore the value of sales at break-even level is $ 5,000,000.

Sales of Deluxe Product in Dollars at break-even level= Total Sales at break-even level X Sales mix of Deluxe

                                                       = $ 5,000,000 X 40%

                                                       = $ 2,000,000     

Therefore the Sales of Deluxe product at break-even level is $ 2,000,000

Answer 3)

Calculation of Contribution margin per unit of machine hours

Contribution margin per machine hour = (Contribution margin per unit/ Machine hours required for one unit)

Product 12

Contribution margin per machine hour = $ 20/ 2 machine hours

                                                                      = $ 10 per machine hour

There contribution margin per machine hour is $ 10.00

Product 43

Contribution margin per machine hour = $ 18/ 1.50 machine hours

                                                                      = $ 12 per machine hour

There contribution margin per machine hour is $ 12.00

Since, contribution margin per machine hour for Product 43 (i.e. $ 12.00) is higher than that of Product 12 (i.e. $ 10 per machine hour), Hunt Inc. should tell its sales personnel to “push” for “Product 43” in order to maximise overall contribution margin and profit.