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contribution margin

7. General Medical makes disposable syringes for hospitals and doctor supply companies. The company uses cost-plus pricing and currently charges 150 percent of average variable costs. General Medical learned of an opportunity to sell 300,000 syringes to the Department of Defense if they can be delivered within three months at a price not in excess of $1 each. General Medical normally sells its syringes for $1.20 each.
If General Medical accepts the Defense Department order, it will have to forgo sales of 100,000 syringes to its regular customer over this time period, although this loss of sales is not expected to affect future sales.

a. Should General Medical accept the Defense Department order?

b. If sales for the balance of the year are expected to be 50,000 units less because of some lost customers who do not return, should the order be accepted? (Ignore any effects beyond one year.)

Solution Preview

a. Should General Medical accept the Defense Department order?

Normal price of syringe=$1.20
We know that company charges 150% of average variable costs. So,
Average Variable cost =AVC=1.20/150%=$0.80

Now contribution margin per unit in case of defense ...

Solution Summary

The contribution margin is assessed.

$2.19