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# Contribution margin & absorption profit

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JVH controls four independent firms that make special masks for covering facial burns. The firms sell to different geographical regions and do not transfer goods among themselves. They have identical linear cost functions as a function of mask production. Also, they all sell masks for the same price, \$50, and pay sales commissions of \$4 per unit sold.
The 2008 results for the four firms (identified below by their managers) were as follows:
Waters Mason Gilmour Wright

Opening Inventory (Units) 0 0 0 10,000
Units Produced 10,000 30,000 5,000 40,000
Units Sold 10,000 25,000 5,000 50,000

Total Material Cost \$20,000 \$60,000 \$10,000 \$80,000
Total Labor Cost \$50,000 \$150,000 \$25,000 \$200,000
Total Overhead Cost \$150,000 \$250,000 \$125,000 \$300,000
Total Manufacturing Cost \$220,000 \$460,000 \$160,000 \$580,000

1. Compute the total contribution margin for Jason JVH for 2008.
2. Compute the gross margin for Wright for 2008. (You can assume that Wright started in 2007 and that its units produced, and cost behavior, in 2007 were identical to that for 2008).
3. Waters expects to produce 100,000 units in 2009. Assume that cost behavior and selling prices will be identical to those reported for 2008. If fixed S, G & A costs are expected to total \$30,000, how many units must Waters sell in order to generate an absorption profit of \$150,000?

#### Solution Preview

Jason Voorhees Holdings controls four independent firms that make special masks for covering facial burns. The firms sell to different geographical regions and do not transfer goods among themselves. They have identical linear cost functions as a function of mask production. Also, they all sell masks for the same price, \$50, and pay sales commissions of \$4 per unit sold.
The 2008 results for the four firms (identified below by their managers) were as follows:
Waters Mason Gilmour Wright

Opening Inventory (Units) 0 0 0 10,000
Units Produced 10,000 30,000 5,000 40,000
Units Sold 10,000 25,000 5,000 50,000

Total Material Cost \$20,000 \$60,000 \$10,000 \$80,000
Total Labor Cost \$50,000 \$150,000 \$25,000 \$200,000
Total Overhead Cost \$150,000 \$250,000 \$125,000 \$300,000
Total ...

#### Solution Summary

The solution explains how to calculate the contribution margin and absorption profit.

\$2.19