Contribution at the present price set:
Selling Price $300 per unit
Direct Materials $125 per unit
Direct Labor $50 per unit
Variable Overheads $30 per unit
Contribution $95 per unit
From the contribution figure determined above, the organization can sustain a lower selling price of the product marketed. However, one has to bear in mind that a positive contribution does not mean an overall profit. The company is also required to cover the fixed costs in order to attain an overall net profit. In case of idle capacity yet, a lower selling price is acceptable since a greater contribution will be made in such a stance, which will also enhance the profitability.
Evaluation of Ms. Goodpersons SaleContribution per unit $95
Fixed Cost per unit $45
Margin of Safety $50
Minimum price set by Paul Pecos $300
Margin of Safety $ 50
Actual minimum selling price $250
Paul should be more careful in how to communicate with employees, especially in the case of Ms. Goodperson’s sale, since the price charged would still attain a profit. Before trading drastic decisions it is important that financial information is sought. For instance, in this case the selling price agreed by Ms. Goodperson will still generate a positive contribution, because it is higher than the $250 minimum selling price determined from the calculations above.
Contribution Margin Income StatementsPaul Pecos Decision
Contribution Margin Profit Statement$Sales Revenue (see note 1)286,500Variable Costs:Direct Materials ($125 x 925)115,625Direct Labor ($50 x 925)46,250Variable Overheads ($30 x 925)27,750Contribution96,875Fixed Costs450,000Net (Loss)(353,125)
Note 1 – Sales Volume and Revenue
According to lowest selling price of $250
Contribution Margin Profit Statement$Sales Revenue (see note 2)578,000Variable Costs:Direct Materials ($125 x 1,925)240,625Direct Labor ($50 x 1,925)96,250Variable Overheads ($30 x 1,925)57,750Contribution183,375Fixed Costs450,000Net (Loss)(266,625)
Note 2 – Sales Volume and Revenue
Offer Taken290700203,000Sam Smoothtalk
32,5001,925578,000Recommendations to the Situation at Hand
Presently the organization is incurring substantial losses. If the 20,000 targeted units sales are reached, the company would still incur losses. However, such aim is appropriate since the losses will diminish. However, an organization cannot remain active if recurring losses are incurred. Thus the firm should adopt remedial actions that boost its profitability. For example, the present machinery the firm holds could be used to manufacture other profitable products and thus enhance its profits. Cost control measures should also be undertaken in order to control costs and remove expenditure that is not adding value to the organization.
Drury C. (1996). Management and Cost Accounting. Fourth Edition. New York: International Thomson Business Press.