Question

Outdoor Luggage Inc. makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below.

	Ski Guard			Golf Guard			Fishing Guard
Selling price per unit		$200			$300			$255
Variable cost per unit		$60			$140			$55
Plastic injection molding machine processing    time required to produce one unit		2 minutes			5 minutes			4 minutes
Pounds of plastic pellets per unit		7 pounds			4 pounds			8 pounds

Required:
1-a.	The total time available on the plastic injection molding machine is the constraint in the production process. What is the contribution margin per unit of the constrained resources for Ski Guard, Golf Guard and Fishing Guard?

        

1-b.	Which product would be the most profitable use of this constraint?
	Ski Guard Golf Guard Fishing Guard

1-c.	Which product would be the least profitable use of this constraint?
	Ski Guard Golf Guard Fishing Guard

2-a.	A severe shortage of plastic pellets has required the company to cut back its production so much that the plastic injection molding machine is no longer the bottleneck. Instead, the constraint is the total available pounds of plastic pellets. What is contribution margin per unit of the constrained resources for Ski Guard, Golf Guard and Fishing Guard?

        

2-b.	Which product would be the most profitable use of this constraint?
	Ski Guard Golf Guard Fishing Guard

2-c.	Which product would be the least profitable use of this constraint?
	Ski Guard Golf Guard Fishing Guard

3.	Which product has the largest unit contribution margin?
	Ski Guard Golf Guard Fishing Guard

Answer 1

Concepts and reason

Cost: The concept of cost in management accounting refers to the amount paid or amount sacrificed to obtain something. The value of all the costs will have to be determined in monetary values. There are various types of costs in cost accounting. Therefore, identification of the costs is a significant task in management decision making.

Cost-Volume Profit Analysis: Cost-volume profit analysis is a technique which is used to determine the effect that changes in cost and volume of sales have on the operating income and the net income of the company. This managerial accounting technique is based on certain assumptions, which are:

• All the costs involved can be categorized into two categories, that is fixed cost and variable cost.

• Selling price per unit, variable cost per unit and fixed cost remain constant

• All that is produced is sold.

Fundamentals

Variable expenses: The variable expenses are directly linked to the production process. The variable cost per unit remains constant. The total variable cost variates with the production level or activity level. These are considered direct costs which are relevant for the decision-making process. Direct material per unit, labor cost per unit etc. are the examples of variable expenses.

Fixed expenses: Fixed expenses are one-time expenses. Fixed expenses do not variate with the level of production activity. Fixed expenses incur even when there is no production. Fixed expenses remain constant throughout the production process, irrespective of the level of production activity. Fixed cost per unit variates with production level but total fixed cost remains constant. Depreciation, rent etc. are the examples of fixed expenses.

Contribution Margin: Contribution margin is sales revenue minus the variable expenses. Contribution margin per unit of sales is selling price per unit minus variable expenses per unit. Contribution margin is the amount of money with a company for covering its fixed costs. It is the contribution of company’s revenue towards fixed expenses and net income of the company.

Contribution Margin Ratio: Contribution margin ratio is the ration of contribution margin to net sales revenue. It reflects change in contribution margin with change in revenue from sales.

Net operating income: Net operating income is the net income from sales after covering all variable and fixed expenses.

1-a

Calculate contribution margin per unit of constrained resources for each resource as follows:

1-b

The most profitable product is determined as follows:

Since, Ski Guard has the highest contribution margin per unit of constrained resource, it is the most profitable product for use of constrained resource.

1-c

The least profitable product is determined as follows:

Since, Golf Guard has the least contribution margin per unit of constrained resource, it is the least profitable product for use of constrained resource.

2-a

The most profitable product is determined as follows:

2-b

The most profitable product is determined as follows:

Since, Golf Guard has the highest contribution margin per unit of constrained resource, it is the most profitable product for use of constrained resource.

2-c

The least profitable product is determined as follows:

Since, Ski Guard has the least contribution margin per unit of constrained resource, it is the least profitable product for use of constrained resource.

3.

Thus, Product Fishing Guard has the highest contribution margin per unit, that is, $200 per unit.

Ans: Part 1-a.