Question
14-40 Sales revenue for one jar of silver polish ........................................ $4.00 Sales revenue for 1/4 pound of Grit 337 .......................................... .50 Incremental revenue from further
14-40
Sales revenue for one jar of silver polish ........................................ |
| $4.00 |
Sales revenue for 1/4 pound of Grit 337 .......................................... |
| .50 |
Incremental revenue from further processing ................................. |
| $3.50 |
Incremental costs of further processing: |
|
|
Processing costs ............................................................................ | $2.50 |
|
Selling costs ................................................................................... | .30 | 2.80 |
Incremental contribution margin from further processing into silver polish (per jar) ............................................ |
| $ .70 |
Indifference point in units =
= 8,000 jars
If more than 8,000 jars of silver polish can be sold, Zytel Corporation should process the required amount of Grit 337 further into the polish.
Exercise 14-41 (10 minutes)
The most profitable product is the one that yields the highest contribution margin per unit of the scarce resource, which is direct labor. We do not know the amount of direct-labor time required per unit of either product, but we do know that Dos requires six times as much direct labor per unit as Uno. Define an arbitrary time period for which direct laborers earn $1.00, and call this a time unit. The two products contribution margins per time unit are calculated as follows:
| Uno |
| Dos |
Unit contribution margin .................................................... | $3.00 |
| $12.00 |
Time units required per unit of product ........................ | 1 |
| 6 |
Contribution margin per time unit |
|
|
|
Uno: ($3.00 1) ................................................................ | $3.00 |
|
|
Dos: ($12.00 6) .............................................................. |
|
| $2.00 |
Therefore, Uno is a more profitable product. Any arbitrary amount of direct labor time expended on Uno production will result in a greater contribution margin than an equivalent amount of labor time spent on Dos production.
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