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ID: 2394610 • Letter: I
Question
I am struggling with figureing this out as a practicing question! Please show me the work for how to get the correct answers!
ABC Company produces two separate products, product A and product B. Information on product A and B is reported below:
Product A Product B
Sales Price: $1,000 $1,800
Direct Materials $100 $500
Direct Labor $250 $600
Variable Overhead $50 $400
Commissions: $25 $40
Company information:
Fixed Manufacturing overhead: $400,000 per year
Fixed Administrative Expenses: $375,000 per year
Tax rate: 25%
ABC Company has to decide which of the following sales mixes will generate the best overall results for the company:
Option 1: Sell 5,000 units of Product A and 2,000 units of Product B
Option 2: Sell 3,000 units of Product A and 4,000 units of Product B
Which option would you recommend to ABC Company and why? Based off of what you know about CVP now, why do you think that the numbers worked out the way that they did?
Explanation / Answer
Let us use Conttribution margin method to decide the best alternative mix for the company Contri bution = Sales -Variable Expenses Particulars Product A Product B Selling Price Per Unit 1000 1800 Less Variable Expenses Direct Materials 100 500 Direct Labour 250 600 Variable Overhead 50 400 Commissions 25 425 40 1540 Contribution Per Unit 575 260 Option 1 No. Of Units Contribution/ Unit Contribution Product A 5000 575 2875000 Product B 2000 260 520000 3395000 Option 2 No. Of Units Contribution/ Unit Contribution Product A 3000 575 1725000 Product B 4000 260 1040000 2765000 I recommend the Option 1 as that product mix makes higher contribution for the company As the Fixed cost for both products stands the same the higher contribution generating unit will produce best results for the company
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