Determining the contribution margin per unit


Assignment: Capacity and product mix decision

Barney Toy Company manufactures large and small stuffed animals. It has a long-term contract with a large chain of discount stores to sell 3,000 large and 6,000 small stuffed animals each month. The following cost information is available for large and small stuffed animals.

Item                                          Large                                     Small

Price/Unit                                    $32                                         $21

Variable Costs/Unit

Direct Material                             $12                                         $10

Direct Labor                                 $6                                           $2

Variable Support                           $2                                           $1

Fixed Costs Per Unit                      $3                                           $3

Total Unit Costs                           $23                                         $16

Estimated Demand                     15,000                                   25,000

Production occurs in batches of 100 large or 200 small stuffed animals. Each batch takes a total of 10 machine hours to manufacture. The total machine hour capacity of 3,000 machine hours cannot be increased for at least a year.

a. Determine the contribution margin per unit for each of the two sizes of stuffed animals.

b. Determine which size is more profitable to produce. How many units of each size should Barney produce?

c. Because of an unexpected high demand for stuffed dinousaurs, the discount store chain has requested an additional order of 5,000 large stuffed dinosaurs. It is willing to pay $37 per dinosaur for this special order. Determine the opportunity cost associated with this order.

d. Should Barney Toy Company accept the order described in c.? Explain.

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Accounting Basics: Determining the contribution margin per unit
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