Question

Pole Company manufactures two products called Tap and Bounce that sell for $360 and $240, respectively. Each product uses only one type of raw material that costs $18 per pound. The company has the capacity to annually produce 300,000 units of each product. Its unit costs for each product at this level of activity are given below:

Tap      Bounce

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . .     $ 90     $36

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    60        45

Variable manufacturing overhead. . . . . . . . . . . . .     21        15

Traceable fixed manufacturing overhead. . . . . . .      48        54

Variable selling expenses. . . . . . . . . . . . . . . . . . .      36        24

Common fixed expenses. . . . . . . . . . . . . . . . . . . .     45        30

Total cost per unit. . . . . . . . . . . . . . . . . . . . . . . . . .    $300    $204

The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.

Required:

What contribution margin per pound of raw material is earned by Tap and Bounce?

Answer 1

Contribution margin per unit = Sales price per unit - Direct materials per unit - Direct labour per unit - Variable manufacturing overhead per unit - Variable selling expenses per unit

Contribution margin per unit for Tap = $360 - $90 - $60 - $21 - $36

= $153

Contribution margin per unit for Bounce = $240 - $36 - $45 - $15 - $24

= $120

	Tap	Bounce
Direct materials cost per unit	$90	$36
Direct materials cost per pound	$18	$18
Number of pounds per unit	5 ($90/$18)	2 ($36/$18)
Contribution margin per unit	$153	$120
Contribution margin per pound	$30.6 ($153/5)	$60 ($120/2)