# CMA Study Group

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## Part 2 Query - Contribution Margin

• #### 1.  Part 2 Query - Contribution Margin

Posted 21 days ago

Dear All,

Looking to understand rationale behind this question and the answer as provided in Wiley (Answer provided by Wiley is "Shaping".. While I agree to the explanation, I fail to understand as to why Smoothing can't also be the right answer? Since it too has incremental contribution of 1, same as Shaping.. Any thoughts?

A company currently has a four-stage manufacturing process in the following order: Processing, Smoothing, Shaping, and Painting. There is a market for the output of each stage. A newly appointed management accountant has been examining the company's operations, and has prepared the following information.

Manufacturing Stage Total Selling Price of Output Incremental Variable Cost Per Stage
Processing \$10 \$8
Smoothing 12 1
Shaping 18 5
Painting 20 3

Given the information presented, selling the output after which one of the following stages will yield the greatest contribution margin?

*Source: Retired ICMA CMA Exam Questions.

 Processing Smoothing Shaping Painting
To determine when output should be sold to yield the greatest contribution margin, it is necessary to compare the increase in revenue from performing a stage to the increase in cost from performing a stage. This will tell if performing the stage increases the contribution margin. It is also necessary to do the same analysis on the next stage as you need to determine if the next stage also increases the contribution margin. Performing the "Shaping" stage increases revenue by \$6 per unit (from \$12 to \$18) while only increasing the cost by \$5 per unit. This means contribution margin will increase by \$1 from the "Shaping" stage. On the other hand, the "Painting" stage increases revenue by \$2 per unit while costs increase by \$3 per unit. This means the "Painting" stage should not be performed.

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Abdul Naser Parkar
Analyst
Qatar
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• #### 2.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
You can also compare the contribution margin at each stage using the accumulated cost to see at which stage will produce the highest CM.

Below are the CM based on cumulative cost (selling price less the cumulative cost at each stage)

Processing (\$10 - \$8) = \$2
Smoothing (\$12 - \$9) = \$3
Shaping (\$18 - \$14)= \$4
Painting (\$20 - \$17) = \$3

You can see that Shaping will produce the highest CM among all stages.

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Dennis Azarcon
Controller
Dubai
United Arab Emirates
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• #### 3.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
Dear Dennis,

Yes. But you cannot isolate the incremental costs..

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Abdul Naser Parkar
Analyst
Qatar
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• #### 4.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
Dear Abdul,

You are not isolating the incremental cost. Those are just already embedded when you analyze CM at each stage based on cumulative cost. Anyway, whichever approach you take will just result to the same answer.

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Dennis Azarcon
Controller
Dubai
United Arab Emirates
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• #### 5.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
Dear Dennis

Yes.. Indeed. I get your point.

Thanks.

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Abdul Naser Parkar
Analyst
Qatar
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• #### 6.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
Hi,

This question is simply seeking to know when your contribution turns negative for an additional activity. The revenue is cumulative, whereas the cost is incremental.

Total revenue     Incremental cost      Total V cost    total contribution
10                         8                                 8                     2
12                         1                                 9                     3
18                          5                                14                   4
20                           3                                 17                 3

If you notice, in the last stage, the incremental revenue is only \$2, whereas the incremental cost is \$3. If this activity is taken up, the gross contribution will decrease by \$1, from \$4 to \$3.

Hence the processing should stop at stage 3, i.e., Shaping.

I hope it helps.

Regards,

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Harjjeet Gahla (ACS LLB DBF ADM)
FInancial Controller / Accountant
Calgary Alberta
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• #### 7.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
Dear Harjjeet,

Thank you.. I agree on that.. was considering independently and hence got confused..

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Abdul Naser Parkar
Analyst
Qatar
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• #### 8.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
Dear Bro,

 Manufacturing Stage Total Selling Price of Output Incremental Variable Cost Per Stage Contribution Margin Contribution Margin Ratio Processing \$10 \$8 \$2 20% Smoothing 12 1 \$11 92% Shaping 18 5 \$13 72% Painting 20 3 \$17 85%

Your analysis and conclusion is not correct.Consider each division is independent and they can sale their product independently.
If your concussion is correct,Painting division VC is decreasing from shaping.Do you think VC will decrease?
Please think simply do not complicate

--
Best Regards,

Shamsudheen. Olassery

• #### 9.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
Hi Shamshudeen,

You are comparing apples with oranges.

Sale price is given as "Total" whereas variable cost is incremental for each stage. Hence we need to add stage-wise variable cost to arrive at the total variable cost up to that stage.

Your presentation seems incorrect. Hope you don't mind this response.

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Harjjeet Gahla (ACS LLB DBF ADM)
FInancial Controller / Accountant
Calgary Alberta
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• #### 10.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago
Yes.I missed to consider incremental cost.

--
Best Regards,

Shamsudheen. Olassery

• #### 11.  RE: Part 2 Query - Contribution Margin

Posted 20 days ago

 Manufacturing Stage Total Selling Price of Output Incremental Variable Cost Per Stage Variable Cost Contribution Margin Processing \$10 \$8 \$8 \$2 Smoothing 12 1 \$9 \$3 Shaping 18 5 \$14 \$4 Greatest Painting 20 3 \$17 \$3

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Best Regards,

Shamsudheen. Olassery

• #### 12.  RE: Part 2 Query - Contribution Margin

Posted 19 days ago
Hi

• #### 13.  RE: Part 2 Query - Contribution Margin

Posted 18 days ago
Hi, i want to join the group--
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• #### 14.  RE: Part 2 Query - Contribution Margin

Posted 18 days ago
HI., is there any whatsapp group for part 2,   please add me .. iam going to attend the exam in june 14h. please add me  , my number is +919562335089 .

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Mohamed Ali Nufail
Student
Thrissur
India
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• #### 15.  RE: Part 2 Query - Contribution Margin

Posted 18 days ago
Hi,  Shaping is relevant option.

We should look at scenario, cumulative revenue upto 3rd stage gives revenue of Rs. 18 and cost of Rs. 14/-.

If you add up additional Rs. 2/- your revenue would be 20/- however contribution earned would be decreased by Rs. 1/-.

I have used Rs. Instead of\$.

• #### 16.  RE: Part 2 Query - Contribution Margin

Posted 17 days ago
Yes and thanks for the inputs

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Abdul Naser Parkar
Analyst