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# Calculation of Contribution Margin Per Unit & Machine-Hour for Md Widgets

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MD Widgets manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

Model X Model YModel Z
Selling price \$80 \$90 \$100
Direct materials \$30 30 30
Direct labor (\$10/hour) \$15 15 20
Variable support costs \$5 10 10
(\$5 per machine-hour)
Fixed support costs 20 20 20

a)For each model, compute the contribution margin per unit. b)For each model, compute the contribution margin per machine-hour. c)If there is excess capacity, which model is the most profitable to produce? Why? d)If there is a machine breakdown, which model is the most profitable to produce? Why? e)How can MD encourage her sales people to promote the more profitable model?

Solution:
MODEL XMODEL YMODEL Z
Selling price \$ 80 \$ 90 \$ 100 Direct materials \$ 30 \$ 30 \$ 30 Direct labor (\$10 per hour) \$ 15 \$ 15 \$ 20 Variable support costs (\$5 per machine-hour) \$ 5 \$ 10 \$ 10 Total variable cost \$ 50 \$ 55 \$ 60 Fixed support costs \$ 20 \$ 20 \$ 20

Contribution margin per unit = Selling price per unit – Variable cost per unit \$ 30\$ 35 \$ 40 Contribution margin per machine hour
\$ 30 \$ 18 \$ 20

a) The contribution margin per unit for :
Model X = \$ 30
Model Y = \$ 35
Model Z = \$ 40

b) The contribution margin per machine-hour for:
Model X = \$ 30
Model Y = \$ 35
Model Z = \$ 40

c) If there is excess capacity, which model is the most profitable to produce? Why? Model Z is more profitable since its contribution margin is greater than the other two models which will result in excess profit. d) If there is a machine breakdown, which model is the most profitable to produce? Why? Model X is more profitable at times of machine break-down since the machine hour required per unit is 1, whereas for the other two models 2 machine hours are required e) How can MD encourage her sales people to promote the more profitable model? By introducing a sales commission depending on the most profitable model, MD can encourage her sales people to promote and sell the most profitable model

References:

http://classof1.com/homework-help/accounting-homework-help

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