Question

Porter company manufacturing furniture, including tables. Select cost are given below:

1.- The tables are made of wood that cost $ 100 per tables 2.- The tables are assembled by workers at a wage cost $ 40 per table    3.-Woekers assembling the tables are supervised by a factory supervisor who is paid $ 38,000 per year. 4.- Electrical cost are $ 2 per machine-hour. four machine-hours are required to produce a table. 5.- The depreciation on the machines used to make the tables totals $ 10,000 per year.    6.- The salary of the president of the company is $ 100,000 per year. 7.- The company spends $ 250,000 per year to advertise its products. .8- Salespersons are paid a commission of $ 30 for each table sold. 9.- Instead of producing the tables, the company could rent its factory space for $ 50,000 per year .

Refer to the manufacturing company you selected for the Unit 2 Discussion and explain how you would determine the company’s contribution margin and contribution margin percent. In your initial post include the following: data . Identify which specific variables should be included in the calculation.

• Illustrate your explanation by calculating the contribution margin and contribution margin percent using hypothetical values.
• Explain what your calculated results tell you about the company’s sales and cost structure.

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Expert Answer

e

Answer 1

Calculation of Contribution from sale of tables:

Particulars $

Direct material cost 100

Add:Direct wages    40

Add:Direct varible cost ( Machine cost 4Hrs* 2$/hr) 8   

Prime cost 148

Commission paid for sale of a table    30

Relavent cost for making the decision 178

Points to be noted:

1.supervisor charges are not relavent as this is a fixed expenses and not directly related to the workdone

2. Depreciation and salary of president are not relevant costs as these costs are not directly related to the production of the tables

Suppose if the sale price is taken as 200 or 300$

Sale price 200 300

Less: Relevant cost   (178) (178)

Contribution 22 122

Contribution margin ratio= Contribution per unit/ saleprice *100

22 *100 /200 122*100/300

.11% 41%(roundedoff)

No of units required to match the rental revenue 50000/22 50000/122

2272units   410units

Comments:  

1.Company might be allocating the deprecitaion and other OH(like president salary) to the product which might make the product continuation unviable.

however relevant cost to make the decision as to make or rent the production capacity is only 178$ and if the company can sell above the cost and its estimated market exceeds 2272units its better to produce the units'

2. Also learning curve is also possible going forward for the labour cost as they might take the less time in producing the next units when they attain the expertise which might even lessen the labour cost and increase the

profit for the upcoming periods

3.Depreciation and other allocated cost are allocated costs which are not relevant for decision making under relevent costing.