ABC Manufacturing produces two products, per the cost structure below. Fixed man

Question

ABC Manufacturing produces two products, per the cost structure below. Fixed manufacturing costs are allocated at a rate of $1.00 per machine hour. Cost per unit: Product A Product B Selling price $4.00 $3.00 Variable manufacturing cost $2.00 $1.50 Fixed manufacturing cost $0.75 $0.20 Variable selling cost $1.00 $1.00 The sales manager wants to increase advertising by $160,000 fo r the most profitable product. ABC Manufacturing has capacity of 100,000 machine hours. Required. a. On which product should the sales manager spend the advertising budget? Why? b. If demand for the product chosen in part (a) exceeds the firm’s current capacity, compute ABC Manufacturing’s total contribution margin . c. The sal es manager does not want to exit the market for either Product A or Product B, but instead wants to maintain a minimum production volume of 20,000 units of the less - profitable product. At that minimum production volume, what price must ABC M anufacturing c harge on the less - profitable product in order to generate a total contribution margin for the firm equivalent to your answer in part (b)? d. Compute the percentage markup on the unit variable cost for the less - profitable product required to generate the price identified in part (c).

Explanation / Answer

Product A Product B Selling price $4 $3 Variable manufcturing cost 2 1.5 Variable selling cost 1 1 Total variable cost 3 2.5 Contribution margin $1 $0.5 No. of hours required 0.75 0.2 Contribution per machine hour $1.33 $2.50 ans a He should spend on Product B as contribution per machine hour is more in product B it is $2.5 and for Prouct A it is $1.33 ans b Product B Selling price $3 Variable manufcturing cost 1.5 Variable selling cost 1 Total variable cost 2.5 Contribution margin $0.5 Contribution per machine hour C $2.50 No. of machine hours N 100000 Total contribution margin C*N $250,000 ans c 20000 units of Produce A requires 15000 hours (20000*.75) 85000 hours left for Product B Total contribution required $250,000 Contribution from product B 85000*2.5 212500 Contribution from product A $37,500 Contribution on 20000 units of A 20000x=37500 x=37500/20000 1.875 Product A Selling price $4.875 Variable manufcturing cost 2 Variable selling cost 1 Total variable cost 3 Contribution margin $1.875 ABC should charge $4.875 on product A ans d % markup on unit variable cost 62.5 % 1.875/3*100

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