# Compute contribution margin

Shelby Company produces three products: product X, product Y, and product Z. Data concerning the three products follow (per unit):

Product X

Product Y

Product Z

Selling price

$

85

$

65

$

75

Less variable expenses:

Direct materials

25.50

19.50

5.25

Labor and overhead

25.50

29.25

47.25

Total variable expenses

51.00

48.75

52.50

Contribution margin

$

34.00

$

16.25

$

22.50

Contribution margin ratio

40

%

25

%

30

%

--------------------------------------------------------------------------------

Demand for the company's products is very strong, with far more orders each month than the company can produce with the available raw materials. The same material is used in each product. The material costs $6 per pound, with a maximum of 4,400 pounds available each month.

Required :

(a)

Compute contribution margin per pound of materials used. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Contribution margin

Product X

$

Product Y

$

Product Z

$

--------------------------------------------------------------------------------

(b)

Which orders would you advise the company to accept first, those for product X, for product Y, or for product Z? Which orders second? Third?

Product X

(Click for List) First Second Third

Product Y

(Click for List) First Second Third

Product Z

(Click for List) First Second Third

https://brainmass.com/business/product-management/compute-contribution-margin-211986

#### Solution Preview

Exercise 13-11 Utilization of a Constrained Resource [LO5]

Shelby Company produces three products: product X, product Y, and product Z. Data concerning the three products follow (per unit):

Product X Product Y Product Z

Selling price $ 85 $ 65 $ 75

Less variable expenses:

Direct materials 25.50 19.50 5.25

Labor and overhead 25.50 29.25 47.25

Total variable expenses ...

#### Solution Summary

This provides the steps to calculate the compute contribution margin

Andre's Hair Styling: Compute contribution margin

Andre has asked you to evaluate his business, Andre's Hair Styling. Andre has five barbers working for him. (Andre is not one of them.) Each barber is paid $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. Rent and other fixed expenses are $1,750 per month. Hair shampoo used on all clients is .40 per client. Assume that the only service performed is the giving of haircuts (including shampoo), the unit price of which is $12. Andre has asked you to find the following information.

1. Find the contribution margin per haircut. Assume that the barbers' compensation is a fixed cost. Show calculations to support your answer.

2. Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.

3. What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.

4. Suppose Andre revises the compensation method. The barbers will receive $4 per hour plus $6 for each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)? Show calculations to support your answer.