Question

Contribution Margin Format Example:

Volume                                                                  XX

Sales                                                                       XX

Variable Costs (Listed)                    XX

Variable Costs (Total)                      XX

Contribution Margin                       XX

Fixed Costs (Listed)     XX

Fixed Costs (Total)                           XX

Operating Income                           XX

Data for all questions:

Stuckie produces white school glue. Their glue bottles are primarily sold at department stores across the country. The cost of manufacturing and marketing their glue, at their normal factory volume of 20,000,000 bottles of glue per month, is shown in the table below. Stuckie sells their glue bottles for $1.50 each. Stuckie is making a small profit, but they would prefer to increase their Operating Income.

Hint: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.

  Per Unit                         Per Unit

Unit Manufacturing Costs:

                    Variable Materials                           $0.30

                    Variable Labor $0.35

                    Variable Overhead                          $0.10

                    Fixed Overhead                               $0.25

Total Unit Manufacturing Costs:                                                             $1.00

Unit Marketing Costs:

                    Variable Marketing Costs               $.05

                    Fixed Marketing Costs                    $.20

Total Unit Marketing Costs: $.025

Questions: Show all calculations

1. An office supply chain has offered to purchase 10,000,000 bottles of glue (one time in one month) if the sales price was lowered to $1.25 per bottle for that one-time sale. (This specific sale is all or nothing – they will not purchase less than 10,000,000 bottles). Stuckie’s maximum capacity is 25,000,000 units, and this special sale would not impact the sales price of Stuckie’s normal sales to their usual customer base.

1. Prepare a monthly contribution margin income statement to show what would happen if Stuckie’s accepted the special sale to the office store chain and didn’t sell any other glue that month.
2. Prepare a monthly contribution margin income statement to show what would happen if Stuckie’s accepted the special sale to the office store chain and produced at maximum capacity to sell as much glue as possible to their normal customers.
3. Compare Stuckie’s normal contribution margin income statement (from question 1) to the options available through the office supply chain (1A & 1B). Should Stuckie’s accept the specific sale from the office supply chain? Why or why not?

Answer 1

Particulars	Existing situation
Amount	Working
Volume	2,00,00,000
Sales	$        3,00,00,000
Variable costs (Listed)	$                     0.80	0.30+0.35+0.10+0.05
Variable costs (Total)	$        1,60,00,000
Contribution margin	$        1,40,00,000
Fixed costs (Listed)	$                     0.45	0.25+0.20
Fixed costs (Total)	$            90,00,000
Operating Income	$            50,00,000
1 A)
Particulars	Special offer accepted
Amount	Working
Volume	1,00,00,000
Sales	$        1,25,00,000	10000000*1.25
Variable costs (Listed)	$                     0.80	0.30+0.35+0.10+0.05
Variable costs (Total)	$            80,00,000
Contribution margin	$            45,00,000
Fixed costs (Listed)
Fixed costs (Total)	$            90,00,000	Same as above
Operating Income	$          -45,00,000
1 B)
Particulars	Special offer accepted
Amount	Working
Volume	2,50,00,000
Sales	$        3,50,00,000	15000000*1.50+10000000*1.25
Variable costs (Listed)	$                     0.80	0.30+0.35+0.10+0.05
Variable costs (Total)	$        2,00,00,000
Contribution margin	$        1,50,00,000
Fixed costs (Listed)	$                     0.36	90,00,000/2,50,00,000
Fixed costs (Total)	$            90,00,000	Same as above
Operating Income	$            60,00,000
1 C)
Particulars	Existing situation	Special offer accepted as per 1 A)	Special offer accepted as per 1B)
Amount	Working	Amount	Working	Amount	Working
Volume	2,00,00,000		1,00,00,000		2,50,00,000
Sales	$        3,00,00,000		$     1,25,00,000	10000000*1.25	$         3,50,00,000	15000000*1.50+10000000*1.25
Variable costs (Listed)	$                     0.80	0.30+0.35+0.10+0.05	$                  0.80	0.30+0.35+0.10+0.05	$                      0.80	0.30+0.35+0.10+0.05
Variable costs (Total)	$        1,60,00,000		$        80,00,000		$         2,00,00,000
Contribution margin	$        1,40,00,000		$        45,00,000		$         1,50,00,000
Fixed costs (Listed)	$                     0.45	0.25+0.20			$                      0.36	90,00,000/2,50,00,000
Fixed costs (Total)	$            90,00,000		$        90,00,000	Same as above	$            90,00,000	Same as above
Operating Income	$            50,00,000		$       -45,00,000		$            60,00,000

As by comparing we can see option provided in 1B is providing highest contribution and operating income so

Yes, Stuckie should accept the specific sale from the office supply chain and sell balance units to normal customers

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