Question

Jonah Hill Company manufactures two products. Information about the two products is as follows:

​

Product X

Product Y

Selling price per unit

$80

$30

Variable costs per unit

40

20

Contribution margin per unit

$40

$10

The company expects fixed costs to be $185,000. The firm expects 70% of its sales (in units) to be Product X and 30% to be Product Y (a sales mix of 7:3).

a. Calculate the weighted average contribution margin or contribution margin by package

b. Determine the breakeven point in total units, and how much would come from products X and Y

c. Determine the level of sales (in dollars) necessary to generate operating income of $185,000

d. Identify and explain 3 separate ways in which the company can use the above information to improve overall profitability. ​​​​​

Answer 1

Weighted average contribution margin is calculated as

for the easy understanding consider that the total sales is 100 units the no of units A sold will be 70 and B is 30

now lets calculate total contribution

from A is 2800 ( 40*70 )

and from B is 300 (30*10)

total is 3100

So we get $3100 contribution from 100 units so from one unit ie Weighted average contribution margin is $31 per unit

Break even point is point in which no profit is realised ie the contribution = Fixed expense

so Break even point in units = Fixed expense / Contribution per unit

Fixed expense = $185000

So Break even point in units = 185000/31 = 5967.74 units

out of which A (70%) = 4177.41

and B (30%) = 1790.33

The no of units for required profit is calculated as

(fixed expense + desired profit) / Contribution per unit

( 185000+185000 )/31 = 11935.48 units

out of which A = 8354.84

and B = 3580.64

So in amount = (8354.84*80) + (3580.64*30) = 775806.4

In amount is $775806.4

The ways to increase profitability are

1.Increase the sales of A than B because the Contribution margin ratio of A(50%) is greater than B(33.33%)

2. Increase the sales as the sales increases the profit increases

3. Reduce the Variable cost per unit and fixed cost