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
Canada
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Original Message:
Sent: 03-20-2021 02:57 AM
From: Abdul Naser Parkar
Subject: Part 2 Query - Contribution Margin
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 | |
This Answer is Correct
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
Al Nasr, Al Sadd Doha
Qatar
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