Question

The Stan Company manufactures a product that is expected to incur $ 60 per unit in variable production costs and sell for $ 150 per unit. The sales commission is 5​% of the sales price. Due to intense​ competition, Stan actually sold 200 units for $ 125 per unit. The actual variable production costs incurred were $ 75.00 per unit. Calculate the total contribution margin and contribution margin ratio at the expected​ price/costs and the actual​ price/costs. How might management use this​ information?

Answer 1

Answer:

Contribution margin at expected price is $16,500

Contribution margin ratio at expected price is 55%

Contribution margin at actual price is $8,750

Contribution margin ratio at actual price is 35%

Explanation:

Given:

Sales = 200 units

Expected selling price = $150

Total expected sales = 200×150 = $30,000

Variable cost:

Expected Production cost = 60×200 = $12,000

Sales commission = 0.05×30,000 = $1,500

Total variable cost = 12,000 + 1500

                               = $13,500

Expected contribution margin = Sales - variable cost

                                                  = 30,000 - 13,500

                                                  = $16,500

Expected contribution margin = $\frac{Contribution\ margin}{Sales} \times 100$

                                                  = $\frac{16,500}{30,000} \times100$

                                                  = 55%

Calculation of contribution margin at actual price:

Given:

Sales = 200 units

Expected selling price = $125

Total expected sales = 200×125 = $25,000

Variable cost:

Expected Production cost = 75×200 = $15,000

Sales commission = 0.05×25,000 = $1,250

Total variable cost = 15,000 + 1250

                               = $16,250

Expected contribution margin = Sales - variable cost

                                                  = 25,000 - 16,250

                                                  = $8,750

Expected contribution margin = $\frac{Contribution\ margin}{Sales} \times 100$

                                                  = $\frac{8,750}{25,000} \times100$

                                                  = 35%

There is is significant variation between contribution margin and contribution margin ratio in the above cases. Management should essentially analyze the reasons for variation in the expected and actual variable production costs. In case the company is not able to increase its contribution margin, it should think about discontinuing the product. Management should also evaluate its product profitability prediction methods as they were not effective in predicting costs causing such massive variations.