ROSE INCORPORATED MANUFACTURERS

ROSEINCORPORATED MANUFACTURERS

INSTITUTIONAFFILIATED

QUESTION1:

Determinethe contribution margin per unit for each type of vase

Contributionmargin = Selling price per unit product (P) – Variable cost perunit product (V)

CONTRIBUTION MARGIN PER VASE

SMALL VASE

LARGE VASE

Sale price

$60

$100

Variable costs

($35)

($60)

Contribution margin

$25

$40

[ CITATION Col06 l 1033 ]

QUESTION2:

Determinethe contribution margin per machine hour for each type of vase

Contributionmargin per machine hour[ CITATION Col06 l 1033 ]=

CONTRIBUTION MARGIN PER MACHINE HOUR

SMALL VASE

LARGE VASE

Contribution margin

$25

$40

Machine hours required for 1 vase

1 hour

2 hours

25/1

40/2

Contribution margin per machine hour

$25/ hour

$20/ hour

QUESTION3:

Determinedthe number of units of each style of vase that Rose Incorporatedshould produce to maximize operating income.

Theoptimal number of units/vases to produce should be able to breakeven. Since we have determined the variable costs and obtained thecontribution margin, using the total fixed costs, we will be able toaccess the number of units required to ensure that the fixed costsare fully covered to nil[ CITATION Col06 l 1033 ].

NUMBER OF UNITS TO MAXIMIZE OPERATING INCOME

SMALL VASE

LARGE VASE

Sale price

$60

$100

Variable costs

($35)

($60)

Contribution margin

$25

$40

Total Fixed costs

600,000

600,000

Optimal number of units

Number of units to maximize operating income

24,000 units

15,000 units

QUESTION4:

Whatthe dollar amount of the maximum operating income is as calculated inC above.

Fromthe number of units given which Rose Incorporated can produce maximumof each type of vase, the calculations in dollars will be as follows(Using 25,000 units for each type of vase)

Saleprice: Small Vase= $60 x 25,000 units = $ 1,500,000

Large Vase= $100 x 25,000 units = $ 2,500,000

Variablecosts: Small Vase = $35 x 25,000 units = $ 875,000

Large Vase = $60 x 25,000 units = $ 1,500,000

CONTRIBUTION MARGIN PER VASE

SMALL VASE

LARGE VASE

Sale price

$ 1,500,000

$ 2,500,000

Variable costs

($ 875,000)

($ 1,500,000)

Contribution margin

$ 625,000

$ 1,000,000

Less Fixed costs

($ 600,000)

($ 600,000)

Operating Income ($)

$ 25,000

$ 400,000

References

Drury, C. (2006). Cost and Management Accounting: An Introduction . London: Cengage Learning EMEA.