Hi VAN
Hope you are doing well in the best of your health and spirits
This is my solution to question # 28.
The cost structure change is effected for Crates and not for Boxes. So our focus should be spot on with this issue. Other Fixed and common costs are irrelevant costs for the proposed change.
Current Contribution Margin = $3. this is computed by
Sales Prices $20 minus VC of $17 ( DM $5 + DL $8 +V-OH $3+V.Selling Cost $1) , provides CM of $3
Proposed change in Cost Components
The new Contribution Margin =$3.25, this is arrived as follows:
Sales Prices $20 minus VC of $16,25 ( DM $2.5* + DL $8 +V-OH $5.25**+V.Selling Cost $1) , provides CM of $3.25
* 50% of $5 (reduction in Direct Material Cost) = $2.5
** Machine Hours Increase for Crates is 3,5 hours per unit, prorated as ($3 X 3.5) /2= $5.25, allocated to Variable Overhead
Increased (total) Contribution is 500000 units of Crates X($3.25-$3) = $125000
I am happy to get your views, in case you see a different solution or approach.
I wish you good luck in your CMA Journey.
Kind regards
Srirama
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Srirama Nagarajan
Chennai
India
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Original Message:
Sent: 08-09-2020 10:13 PM
From: Jobin Thomas
Subject: Help Explain answer of questions- Part 2
Hello Van,
question 20:
Current price is $50, current variable cost is $38, therefore current contribution margin is $12 (or 24%).
now they want to maintain a contribution margin of 16% going forward after using the new sales price.
New price $40, new contribution margin should be 16%, therefore, new variable cost should be [$40 - (40 x (1-.16)] = 33.6
Therefore, reduction in variable cost is $38-33.6 = 4.4
hope that helps.
Jobin Thomas
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Jobin Thomas
Analyst
Warwick PA
United States
Original Message:
Sent: 08-09-2020 11:04 AM
From: VAN HUA
Subject: Help Explain answer of questions- Part 2
Hello,
Can you explain answer of these questions? I cannot find out how to get this
Lazar Industries produces two products, Crates and Boxes. Per unit selling prices, costs. and resource utilization for these products are as follows.
Direct material costs. 5 5
Variable overhead costs 3 5
Variable selling costs. 1 2
Machine hours per unit. 2 4
Production of Crates and Boxes involves joint processes and use of the same facilities. The total fixed factory overhead cost is S2,000,000 and total fixed selling and administrative costs are $840,000. Production and sales are scheduled for 500,000 units of Crates and 700.000 units of Boxes. Lazar maintains no direct materials, work-in- process, or finished goods inventory. Lazar can reduce direct material costs for Crates by 50% per unit, with no change in direct labor costs. However, it would increase machine-hour production time by 1-1/2 hours unit. For Crates, variable overhead costs are allocated based on machine hours. per What would be the effect on the total contribution margin if this change was implemented?
D.$1,250,000 increase
Recent economic conditions are forcing MegaCorp to drop its price from $ 50 to $ 40 per unit, but the company expects its sales to rise from 600,000 to 750,000 units. The company's current variable cost per unit is $ 38. Suppose MegaCorp would like to maintain a 16% target contribution margin on its sales revenue. To achieve this target, the company must lower its variable production costs by: