On 1/1/11 Erin Rogers ESTIMATES the following fixed PRODUCT costs: Janitorial Sa

Question

On 1/1/11 Erin Rogers ESTIMATES the following fixed PRODUCT costs: Janitorial Salaries for manufacturing facility $40,000 Rent on Manufacturing Facility $200,000 Erin Rogers, UW-M graduate, creates the following standards for the sandwiches: 1. Compute the GROSS MARGIN in terms of total $ ?s for all 3 products. 2. Compute the CONTRIBUTION margin in terms of total S?s for all 3 products. 3. Abbott is thinking about discontinuing the Tuna Sandwich product line. If it does so, it will reduce the janitorial salaries by $1,000. Should Abbott discontinue the Tuna sandwiches line? Why or why not and 4. Assume that the toaster/machine can only run a total of 1100 hours or it will break. How many of each sandwich should abbott make? Show your work..

Explanation / Answer

Answer:

a.)

Gross margin is calculated by subtracting cost of goods sold from revenue and dividing the result by revenues.

Now in case of this company there are three products having their different sale price and cost of goods sold (COGS) as well as their demand.

For Ham sandwich:

Annual Demand = 4000 sandwich

Price per sandwich = $10

COGS = $4.3

Therefore, Profit = $10 - $4.3 = $5.7/sandwich

Therefore total profit = 4000 x $5.7 = $22800

And total sales/revenues = 4000 x $10 = $40000

For PB&J sandwich:

Annual Demand = 5000 sandwich

Price per sandwich = $15

COGS = $12

Therefore, Profit = $15 - $12 = $3/sandwich

Therefore total profit = 4000 x $3 = $12000

And total sales/revenues = 5000 x $15 = $75000

For Tuna sandwich:

Annual Demand = 6000 sandwich

Price per sandwich = $6

COGS = $8.8

Therefore, Loss = $6 - $8.8 = $2.8/sandwich

Therefore total loss = 6000 x $2.8 = $16800

And total sales/revenues = 6000 x $6 = $36000

Therefore from the above:

Total sales made by the Company = $40000 + $75000 + $36000

                                                        = $151000

Total profit during the year = $22800 + $12000 - $16800 = $18000

So profit margin=Total profit/total sales x 100% = $18000/$151000 x100%

Profit margin = 11.92%

b.)

For Ham sandwich:

Annual Demand = 4000 sandwich

Price per sandwich = $10

Variable cost per sandwich = $2.5

Therefore, Contribution per sandwich = $10 - $2.5 = $7.5/sandwich

Therefore total Contribution = 4000 x $7.5 = $30000

And total sales/revenues = 4000 x $10 = $40000

For PB&J sandwich:

Annual Demand = 5000 sandwich

Price per sandwich = $15

Variable cost per sandwich = $6.8

Therefore, Contribution per sandwich = $15 - $6.8 = $8.2/sandwich

Therefore total Contribution = 5000 x $8.2 = $41000

And total sales/revenues = 5000 x $15 = $75000

                                      

For Tuna sandwich:

Annual Demand = 6000 sandwich

Price per sandwich = $6

Variable cost per sandwich = $5.2

Therefore, Contribution per sandwich = $6 - $5.2 = $0.8/sandwich

Therefore total Contribution = 6000 x $0.8 = $4800

And total sales/revenues = 6000 x $6 = $36000

Therefore from the above:

Total sales made by the Company = $40000 + $75000 + $36000

                                                        = $151000

Total contribution during the year = $30000 + $41000 + $4800 = $75800

So contribution margin = Total sales- total contribution = $75200

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