ACCOUNTING
memo92
assignment_1_.pptxIncremental Application: Solution
ABC Company currently sells 400 units of a
product at $250/unit and variable costs are
$150/unit. Calculate the contribution margin,
total contribution and contribution rate.
Contribution margin = $250-$150 = $100/unit
Total contribution = $100 X 400 = $40,000
Contribution rate = 100 / 250 = .40 = 40%
Before making any applications…let’s determine the key ingredients
Now we can examine some possible scenarios that might arise for ABC Company
Incremental Application
2. If increasing advertising by $10,000 meant that
sales revenue would increase by $30,000, should the company do it?
sales are given as a dollar figure, not as units, so contribution rate (40%) must be used
Ask yourself:
is it worth spending $10,000 to create the additional contribution that the additional sales will create?
Incremental Application
3. If ABC could decrease variable costs by $25/unit, but it would mean that sales volume would drop to 350 units, should the company do it?
Think: What is the new total contribution that I will make, and is this better or worse than the contribution I had before?
Incremental Application
4. If by dropping price by $20/unit, and increasing advertising by $15,000, ABC could expect sales volume to increase by 50%, should they do it?
Incremental Application
5. If by paying the sales people a commission of $15/unit , ABC
expects to increase sales volume by 15% and reduce salaries by
$6,000. Should they do it?
Incremental Application
6. If ABC was covering fixed costs now, and had
the opportunity to make a bulk sale of 150
units, what price should they charge in
order to profit $3,000?
Incremental Application
7. If ABC is in a slump and it is only selling 200 units (variable costs are still $150/unit, and price is still $250/unit), should it take an order for an additional 50 units that would increase variable costs by $50/unit on those units only? Assume that fixed costs are $30,000.
