Homework Answers
Solution:
1.From the given information,
Selling price of valve 1 = Revenue generated by valve 1 / No. of units of valve 1 sold
= 625000 / 25000
= $25
Selling price of valve 2 = Revenue generated by valve 2 / No. of units of valve 2 sold
= 1000000 / 50000
= $20
Contribution ratio = Total Contribution margin for valve / Sales
For valve 1,
20% = Total Contribution margin for valve 1/ 625000
Total Contribution margin for valve 1 = 625000 * 20%
= 125000
Contribution margin per valve 1 = Total Contribution margin for valve 1 / No. of units of valve 1 sold
= 125000 / 25000
Contribution margin per valve 1 = $5
For valve 2,
40% = Total Contribution margin for valve 2/ 1000000
Total Contribution margin for valve 2 = 1000000 * 40%
= 400000
Contribution margin per valve 2 = Total Contribution margin for valve 2 / No. of units of valve 1 sold
= 400000 / 50000
Contribution margin per valve 2 = $8
Revenue – Total Variable cost = Contribution margin.
Total variable cost for valve 1 = Revenue generated by valve 1 – Total Contribution margin for valve 1
= 625000 – 125000
= $500,000
Per Unit variable cost for valve 1 = 500000 / 25000
= $20
Total Variable cost for valve 2 = 1000000 – 400000
= $600,000
Per unit variable cost for valve 2 = 600000 / 50000
= $12
Contribution margin Income Statement:
|
Valve 1 |
Valve 2 |
Total |
|
|
Revenue |
625000 |
1000000 |
1625000 |
|
Total Variable Manufacturing Cost |
500000 |
600000 |
1100000 |
|
Contribution margin |
125000 |
400000 |
525000 |
|
Fixed Manufacturing Cost |
125000 |
145000 |
270000 |
|
Fixed Non-Manufacturing Cost |
85000 |
110000 |
195000 |
|
Income from Operations |
-85000 |
145000 |
60000 |
2.
|
Per Unit |
Valve 1 |
Valve 2 |
|
|
Selling price |
25 |
20 |
|
|
Variable cost |
20 |
12 |
|
|
Contribution margin |
5 |
8 |
|
|
Valve 1 |
Valve 2 |
Total |
|
|
Unit sales |
35000 |
45000 |
|
|
Revenue |
875000 |
900000 |
1775000 |
|
Total Variable Manufacturing Cost |
700000 |
540000 |
1240000 |
|
Contribution margin |
175000 |
360000 |
535000 |
|
Fixed Manufacturing Cost |
125000 |
145000 |
270000 |
|
Fixed Non-Manufacturing Cost |
85000 |
110000 |
195000 |
|
Income from Operations |
-35000 |
105000 |
70000 |
Increase in Income = $70,000 - $60,000
= $10,000
The effect of this promotion is increase in income by $10,000. The sales are increased by $150,000.
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