Question

. Did variable selling cost per unit figure into any of your calculations? Which ones, if any? . Is there anything misleading about the figure given for fixed manufacturing overhead? . What is the significance of contribution margins with respect to determining how much of each product to produce to maximize profit? What is the significance of contribution margins with respect to determining how much Rutro should pay for additional machine time? Why isn't sales price or the difference between sales prices and the unit costs stated in the problem the best predictor of the priority in producing the products?

Answer 1

· Yes the Variable selling cost per unit is used in calculating contribution margin per unit. Contribution margin per unit is selling price minus variable cost. Variable cost includes manufacturing and non- manufacturing also.

· Yes the fixed manufacturing overhead is shown at per unit level whereas the cost is not incurred at per unit level. Fixed manufacturing overheads facilitate the production and are fixed in nature. They do not vary in relation to production of output. Hence showing them on per unit basis is misleading

· The contribution margin helps in calculating contribution per unit of constraint resource. In the given case the constraint is machine hours. The contribution margin divided by the time required for production of each unit gives contribution margin per constraint resource. The higher the contribution margin per unit of constraint resource the higher the preference it gets in production

· The shortage of machine hours can be procured externally and contribution margin helps in understanding the maximum price what can be offered to external party for machine hours procurement. The maximum what can be paid is machine hour rate plus contribution margin per machine hour of product (to be outsourced)

· The unit costs included fixed manufacturing overheads. Fixed manufacturing overheads are sunk cost and do not play any role in product mix decisions. The relevant costs are variable manufacturing costs and variable non –manufacturing costs only. Hence sale price or difference between sale price and unit cost does not help in reliable decision making.