Cost-Volume-Profit

Analysis

Copyright © 2014 The McGraw-Hill Companies, Inc. All rights reserved.

 The Break-Even Point
The break-even point is the point in the
volume of activity where the
organization’s revenues
and expenses are equal.

Sales
Sales $$250,000
250,000
Less:
Less: variable
variable expenses
expenses 150,000
150,000
Contribution
Contribution margin
margin 100,000
100,000
Less:
Less: fixed
fixed expenses
expenses 100,000
100,000
Net
Net income
income $$ --

7-2
 Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit

Unit Sales Unit Sales

sales × volume variable × volume
price in units expense in units

($500 × X) – ($300 × X) – $80,000 = $0

($200X) – $80,000 = $0
X = 400 surf boards
7-3
 Contribution-Margin Approach
Consider the following information
developed by the accountant at Curl, Inc.:
For each additional surf board sold, Curl
generates $200 in contribution margin.

Total
Total Per
Per Unit
Unit Percent
Percent
Sales
Sales(500
(500surf
surfboards)
boards) $$250,000
250,000 $$ 500500 100%
100%
Less:
Less: variable
variableexpenses
expenses 150,000
150,000 300
300 60%
60%
Contribution
Contributionmargin
margin $$100,000
100,000 $$ 200200 40%
40%
Less:
Less: fixed
fixedexpenses
expenses 80,000
80,000
Net
Net income
income $$ 20,000
20,000

7-4
Contribution-Margin Approach

Fixed expenses Break-even point

=
(in units)
Unit contribution margin
Total
Total Per
PerUnit
Unit Percent
Percent
Sales
Sales(500
(500surf
surfboards)
boards) $$250,000
250,000 $$ 500
500 100%
100%
Less: variable expenses
Less: variable expenses 150,000
150,000 300
300 60%
60%
Contribution
Contributionmargin
margin $$100,000
100,000 $$ 200
200 40%
40%
Less:
Less:fixed
fixedexpenses
expenses 80,000
80,000
Net
Netincome
income $$ 20,000
20,000

$80,000
= 400 surf boards
$200
7-5
 Contribution-Margin Approach

Here is the proof!

Total
Total Per
Per Unit
Unit Percent
Percent
Sales
Sales(400
(400surf
surfboards)
boards) $$200,000
200,000 $$ 500500 100%
100%
Less:
Less: variable
variableexpenses
expenses 120,000
120,000 300
300 60%
60%
Contribution
Contributionmargin
margin $$ 80,000
80,000 $$ 200200 40%
40%
Less:
Less: fixed
fixedexpenses
expenses 80,000
80,000
Net
Net income
income $$ --

400 × $500 = $200,000 400 × $300 = $120,000

7-6
 Contribution Margin Ratio

Calculate the break-even point in sales dollars

rather than units by using the contribution
margin ratio.

Contribution margin
= CM Ratio
Sales
Fixed expense Break-even point
=
CM Ratio (in sales dollars)
7-7
 Contribution Margin Ratio

Total
Total Per
Per Unit
Unit Percent
Percent
Sales
Sales(400
(400surf
surfboards)
boards) $$200,000
200,000 $$ 500500 100%
100%
Less:
Less: variable
variableexpenses
expenses 120,000
120,000 300
300 60%
60%
Contribution
Contributionmargin
margin $$ 80,000
80,000 $$ 200200 40%
40%
Less:
Less: fixed
fixedexpenses
expenses 80,000
80,000
Net
Net income
income $$ --

$80,000
= $200,000 in sales
40%
7-8
 Graphing Cost-Volume-Profit
Relationships
Viewing CVP relationships in a graph gives
managers a perspective that can be obtained in
no other way.
Consider the following information for Curl, Inc.:

300
300units
units 400
400units
units 500
500units
units
Sales
Sales $$ 150,000
150,000 $$ 200,000
200,000 $$ 250,000
250,000
Less:
Less:variable
variable expenses
expenses 90,000
90,000 120,000
120,000 150,000
150,000
Contribution
Contributionmargin
margin $$ 60,000
60,000 $$ 80,000
80,000 $$ 100,000
100,000
Less:
Less:fixed
fixedexpenses
expenses 80,000
80,000 80,000
80,000 80,000
80,000
Net
Netincome
income (loss)
(loss) $$ (20,000)
(20,000) $$ -- $$ 20,000
20,000
7-9
 Cost-Volume-Profit Graph
450,000

400,000

350,000

300,000

250,000
Dollars

200,000

150,000

100,000
Fixed expenses

50,000

100 200 300 400 500 600 700 800

Units

7-10
 Cost-Volume-Profit Graph
450,000

400,000

350,000

300,000

250,000
Dollars

200,000
ns es
x p e
150,000 ot a le
T
100,000
Fixed expenses

50,000

100 200 300 400 500 600 700 800

Units

7-11
 Cost-Volume-Profit Graph
450,000

400,000

350,000

300,000

250,000
Dollars

200,000
ns es
x p e
150,000 ot a le
T
100,000
Fixed expenses

50,000

100 200 300 400 500 600 700 800

Units

7-12
 Cost-Volume-Profit Graph
450,000

400,000
le s
350,000 l s a
a
Tot
300,000

250,000
Dollars

200,000
ns es
x p e
150,000 ot a le
T
100,000
Fixed expenses

50,000

100 200 300 400 500 600 700 800

Units

7-13
 Cost-Volume-Profit Graph
450,000

400,000
le s
l s a a
350,000
a re
Break-even Tot fi t a
300,000
point Pr o
250,000
Dollars

200,000
ns es
x p e
150,000 ot a le
T
Fixed expenses
r ea
100,000
s a
50,000
L os

100 200 300 400 500 600 700 800

Units

7-14
 Profit-Volume Graph
Some managers like the profit-volume
graph because it focuses on profits and volume.

100,000

80,000

60,000
Break-even
point r ea
it a
40,000

r of
20,000 P
Profit

0 `

(20,000) 100 200 300 400 500 600 700

r ea Units
(40,000) s a
s
(60,000)
Lo

7-15
 Target Net Profit

We can determine the number of

surfboards that Curl must sell to earn a
profit of $100,000 using the contribution
margin approach.

Fixed expenses + Target profit Units sold to earn

=
Unit contribution margin the target profit

$80,000 + $100,000
= 900 surf boards
$200

7-16
 Equation Approach

Sales revenue – Variable expenses – Fixed expenses = Profit

($500 × X) – ($300 × X) – $80,000 = $100,000

($200X) = $180,000

X = 900 surf boards

7-17
 Applying CVP Analysis

Safety Margin
• The difference between
budgeted sales revenue and
break-even sales revenue.
• The amount by which sales can
drop before losses occur.

7-18
 Safety Margin
Curl, Inc. has a break-even point of
$200,000 in sales. If actual sales are
$250,000, the safety margin is
$50,000, or 100 surf boards.

Break-even
Break-even
sales
sales Actual
Actualsales
sales
400
400 units
units 500
500 units
units
Sales
Sales $$ 200,000
200,000 $$ 250,000
250,000
Less:
Less: variable
variable expenses
expenses 120,000
120,000 150,000
150,000
Contribution
Contribution margin
margin 80,000
80,000 100,000
100,000
Less:
Less: fixed
fixed expenses
expenses 80,000
80,000 80,000
80,000
Net
Net income
income $$ -- $$ 20,000
20,000
7-19
 Changes in Fixed Costs

••Curl
Curl is
is currently
currently selling
selling 500
500 surfboards
surfboards
per
per year.
year.
••The
The owner
owner believes
believes that
that an
an increase
increase of
of
$10,000
$10,000 in in the
the annual
annual advertising
advertising
budget,
budget, would
would increase
increase sales
sales to
to 540
540
units.
units.

 Should
Should the
the company
company increase
increase the
the
advertising
advertising budget?
budget?
7-20
 Changes in Fixed Costs

Current
Current Proposed
Proposed
Sales
Sales Sales
Sales
(500
(500Boards)
Boards) (540
(540Boards)
Boards)
Sales
Sales $$ 250,000
250,000 $$ 270,000
270,000
Less:
Less:variable
variable expenses
expenses 150,000
150,000 162,000
162,000
Contribution
Contribution margin
margin $$ 100,000
100,000 $$ 108,000
108,000
Less:
Less:fixed
fixed expenses
expenses 80,000
80,000 90,000
90,000
Net
Netincome
income $$ 20,000
20,000 $$ 18,000
18,000

540 units × $500 per unit = $270,000

$80,000 + $10,000 advertising = $90,000

7-21
 Changes in Fixed Costs

Sales will increase by Current

Current Proposed
Proposed
$20,000, but net income Sales
Sales Sales
Sales
decreased by $2,000. (500
(500Boards)
Boards) (540
(540Boards)
Boards)
Sales
Sales $$ 250,000
250,000 $$ 270,000
270,000
Less:
Less:variable
variable expenses
expenses 150,000
150,000 162,000
162,000
Contribution
Contribution margin
margin $$ 100,000
100,000 $$ 108,000
108,000
Less:
Less:fixed
fixed expenses
expenses 80,000
80,000 90,000
90,000
Net
Netincome
income $$ 20,000
20,000 $$ 18,000
18,000

7-22
 Changes in Unit
Contribution Margin

Because of increases in cost of raw materials,

Curl’s variable cost per unit has increased
from $300 to $310 per surfboard. With no
change in selling price per unit, what will be
the new break-even point?

($500 × X) – ($310 × X) – $80,000 = $0

X = 422 units (rounded)

7-23
 Changes in Unit
Contribution Margin

Suppose Curl, Inc. increases the price of

each surfboard to $550. With no
change in variable cost per unit, what
will be the new break-even point?

($550 × X) – ($300 × X) – $80,000 = $0

X = 320 units
7-24
 Predicting Profit Given
Expected Volume

Fixed expenses
Given: Unit contribution margin Find: {req’d sales volume}
Target net profit

Fixed expenses
Given: Unit contribution margin Find: {expected profit}
Expected sales volume

7-25
 Predicting Profit Given
Expected Volume
In the coming year, Curl’s owner expects to
sell 525 surfboards. The unit contribution
margin is expected to be $190, and fixed
costs are expected to increase to $90,000.

Total contribution - Fixed cost = Profit

($190 × 525) – $90,000 = X

X = $99,750 – $90,000
X = $9,750 profit 7-26
CVP Analysis with Multiple
Products
For a company with more than one product,
sales mix is the relative combination in
which a company’s products are sold.

Different products have different selling

prices, cost structures, and contribution
margins.

Let’s assume Curl sells surfboards and

sailboards and see how we deal with
break-even analysis.
7-27
CVP Analysis with Multiple
Products
Curl provides us with the following:
information:
Unit Unit Number
Selling Variable Contribution of
Description Price Cost Margin Boards
Surfboards $ 500 $ 300 $ 200 500
Sailboards 1,000 450 550 300
Total sold 800

Number % of
Description of Boards Total
Surfboards 500 62.5% (500 ÷ 800)
Sailboards 300 37.5% (300 ÷ 800)
Total sold 800 100.0%

7-28
CVP Analysis with Multiple
Products
Weighted-average unit contribution
margin
Contribution Weighted
Description Margin % of Total Contribution
Surfboards $ 200 62.5% $ 125.00
Sailboards 550 37.5% 206.25
Weighted-average contribution margin $ 331.25

$200 × 62.5%

$550 × 37.5%
7-29
CVP Analysis with Multiple
Products
Break-even point
Break-even Fixed expenses
=
point Weighted-average unit contribution margin

Break-even $170,000
=
point $331.25

Break-even
= 514 combined unit sales
point

7-30
CVP Analysis with Multiple
Products
Break-even point
Break-even
= 514 combined unit sales
point

Breakeven % of Individual
Description Sales Total Sales
Surfboards 514 62.5% 321
Sailboards 514 37.5% 193
Total units 514

7-31
Decision Making:
Relevant Costs
and Benefits
 Relevant Information
Information is relevant to a decision
problem when . . .
1.It has a bearing on the future,
2.It differs among competing
alternatives.

14-33
 Relevant Costs
Worldwide Airways is thinking about replacing a three
year old loader with a new, more efficient loader.

New
New loader
loader
List
List price
price $$ 15,000
15,000
Annual
Annual operating
operating expenses
expenses 45,000
45,000
Expected
Expected life
life in
in years
years 11
Old
Old loader
loader
Original
Original cost
cost $$100,000
100,000
Remaining
Remaining bookbook value
value 25,000
25,000
Disposal
Disposal value
value now now 5,000
5,000
Annual
Annual variable
variable expenses
expenses 80,000
80,000
Remaining
Remaining lifelife in
in years
years 11
14-34
 Relevant Costs
Keep
KeepOld
Old Replace
ReplaceOld
Old Differential
Differential
Loader
Loader Loader
Loader Cost
Cost
Depreciation
Depreciation ofof old
oldloader
loader $
$ 25,000
25,000
Write-off
Write-off of
of old
oldloader
loader $
$ 25,000
25,000 $
$ --
Proceeds
Proceedsfrom
fromsale
saleof
of old
oldloader
loader (5,000)
(5,000) 5,000
5,000
Depreciation
Depreciation ofof new
newloader
loader 15,000
15,000 (15,000)
(15,000)
Operating
Operatingcosts
costs 80,000
80,000 45,000
45,000 35,000
35,000
Total
Total costs
costs $
$105,000
105,000 $
$ 80,000
80,000 $
$ 25,000
25,000

The difference in operating costs is relevant

to the immediate decision.

14-35
 Relevant Costs
Here is an analysis that includes only
relevant costs:

Relevant
Relevant Cost
Cost Analysis
Analysis
Savings
Savings inin variable
variable expenses
expenses
provided
provided byby the
the new
new loader
loader $$35,000
35,000
Cost
Cost of
of the
the new
new loader
loader (15,000)
(15,000)
Disposal
Disposal value
value of
of old
old loader
loader 5,000
5,000
Net
Net effect
effect $$25,000
25,000
14-36
 Opportunity Costs
The potential benefit given up
when the choice of one action
precludes a different action.
People tend to overlook or
underestimate the importance
of opportunity costs.
Analysis of Special Decisions
Let’s take a close look at some special
decisions faced by many businesses.

We just received
a special order. Do
you think we should
accept it?

14-38
 Accept or Reject a Special Order
•• A
A travel
travel agency
agency offersoffers Worldwide
Worldwide
Airways
Airways $150,000
$150,000 for for a
a round-trip
round-trip flight
flight
from
from Hawaii
Hawaii toto Japan
Japan onon aa jumbo
jumbo jet.
jet.
•• Worldwide
Worldwide usually
usually getsgets $250,000
$250,000 in in
revenue
revenue from
from this
this flight.
flight.
•• The
The airline
airline is
is not
not currently
currently planning
planning toto
add
add any
any new
new routes
routes and
and has
has two
two planes
planes
that
that are
are idle
idle and
and could
could bebe used
used to
to meet
meet
the
the needs
needs ofof the
the agency.
agency.
•• The
The next
next screen
screen showsshows costcost data
data
developed
developed by by managerial
managerial accountants
accountants at at
Worldwide.
Worldwide.
14-39
Accept or Reject a Special Order

Typical
Typical Flight
Flight Between
Between Japan
Japan and
and Hawaii
Hawaii
Revenue:
Revenue:
Passenger
Passenger $$ 250,000
250,000
Cargo
Cargo 30,000
30,000
Total
Total $$ 280,000
280,000
Expenses:
Expenses:
Variable
Variable expenses
expenses 90,000
90,000
Allocated
Allocated fixed
fixed expenses
expenses 100,000
100,000
Total
Total 190,000
190,000
Profit
Profit $$ 90,000
90,000

Worldwide will save $5,000 in reservation

and ticketing costs if the charter is accepted.
14-40
Accept or Reject a Special Order

Assumes
Assumes excess
excess capacity
capacity
Special
Special price
price for
for charter
charter $$150,000
150,000
Variable
Variable cost
cost per
per flight
flight $$90,000
90,000
Reservation
Reservation cost
cost savings
savings (5,000)
(5,000)
Variable
Variable cost
cost of
of charter
charter 85,000
85,000
Contribution
Contribution from
from charter
charter $$ 65,000
65,000

Since the charter will contribute to fixed costs and

Worldwide has idle capacity, the company should
accept the flight.

14-41
 Accept or Reject a Special
Order

What if Worldwide had no excess

capacity? If Worldwide adds the charter,
it will have to cut its least profitable
route that currently contributes $80,000
to fixed costs and profits.

Should Worldwide still accept the charter?

14-42
Accept or Reject a Special
Order
Assumes
Assumes no
no excess
excess capacity
capacity
Special
Special price
price for
for charter
charter $$ 150,000
150,000
Variable
Variable cost
cost per
per flight
flight $$ 90,000
90,000
Reservation
Reservation cost
cost savings
savings (5,000)
(5,000)
Variable
Variable cost
cost of
of charter
charter 85,000
85,000
Opportunity
Opportunity cost:
cost:
Lost
Lost contribution
contribution on on route
route 80,000
80,000 165,000
165,000
Total
Total $$ (15,000)
(15,000)

Worldwide has no excess capacity, so it

should reject the special charter.
14-43
 Accept or Reject a Special
Order
With excess capacity . . .
Relevant costs will usually be the
variable costs associated with the
special order.
•

Without excess capacity . . .

Same as above but opportunity cost of
using the firm’s facilities for the special
order are also relevant.

14-44
 Outsource a Product or Service
A
A decision
decision concerning
concerning whether
whether anan item
item
should
should bebe produced
produced internally
internally or
or
purchased
purchased from
from an
an outside
outside supplier
supplier is
is
often
often called
called aa “make
“make or
or buy”
buy” decision.
decision.

Let’s
Let’s look
look at
at another
another decision
decision faced
faced by
by
the
the management
management of of Worldwide
Worldwide
Airways.
Airways.

14-45
 Outsource a Product or Service

• An Atlanta bakery has offered to supply

the in-flight desserts for 21¢ each.
• Here are Worldwide’s current cost for
desserts:
Variable
Variable costs:
costs:
Direct
Direct material
material $$ 0.06
0.06
Direct
Direct labor
labor 0.04
0.04
Variable
Variable overhead
overhead 0.04
0.04
Fixed
Fixed costs:
costs:
Supervisory
Supervisory salaries
salaries 0.04
0.04
Depreciation
Depreciation ofofequipment
equipment 0.07
0.07
Total
Totalcost
cost per
per dessert
dessert $$ 0.25
0.25

14-46
Outsource a Product or Service
Not all of the allocated fixed costs will be saved
if Worldwide purchases from the outside bakery.
Cost per Savings from
Dessert Outsourcing
Variable costs:
Direct material $ 0.06 $ 0.06
Direct labor 0.04 0.04
Variable overhead 0.04 0.04
Fixed costs:
Supervisory salaries 0.04 0.01
Equipment depreciation 0.07 -
Total cost per dessert $ 0.25 $ 0.15

14-47
Outsource a Product or Service
If Worldwide purchases the dessert
for 21¢, it will only save 15¢ so
Worldwide will have a loss of 6¢ per
dessert purchased.
Wow, that’s
no deal!

14-48
 Add or Drop a Service,
Product, or Department
One
One of
of the
the most
most
important
important decisions
decisions
managers
managers make
make is
is
whether
whether to
to add
add or
or drop
drop aa
product,
product, service,
service, or
or
department.
department.

Let’s
Let’s look
look at
at how
how the
the
concept
concept ofof relevant
relevant
costs
costs should
should be
be used
used in
in
such
such aa decision.
decision.
14-49
 Add or Drop a Product

Worldwide Airways offers its

passengers the opportunity to
join its World Express Club. Club
membership entitles a traveler
to use the club facilities at the
airport in Atlanta.
Club privileges include a private
lounge and restaurant,
discounts on meals and
beverages, and use of a small
health spa.
14-50
Add or Drop a Product
Sales $200,000
Less: Variable Costs:
Food/Beverage $70,000
Personnel 40,000
Variable overhead 25,000 (135,000)
Contribution Margin 65,000
Less: Fixed Costs:
Depreciation $30,000
Supervisor salary 20,000
Insurance 10,000
Airport fees 5,000
Allocated overhead 10,000 ( 75,000)
Loss $ ( 10,000)
14-51
 Add or Drop a Product
KEEP CLUB ELIMINATE DIFFERENTIAL
Sales $200,000 0 $200,000
Food/Beverage (70,000) 0 (70,000)
Personnel (40,000) 0 (40,000)
Variable overhead (25,000) 0 (25,000)
Contribution Margin 65,000 0 65,000
Depreciation (30,000) (30,000) 0
Supervisor salary (20,000) 0 (20,000)
Insurance (10,000) (10,000) 0
Airport fees ( 5,000) 0 ( 5,000)
Allocated overhead (10,000) (10,000) 0
Loss $ (10,000) $(50,000) $ 40,000

14-52
 Add or Drop a Product
KEEP CLUB ELIMINATE DIFFERENTIAL
N Sales $200,000 0 A $200,000
O Food/Beverage (70,000) 0 V (70,000)
T Personnel (40,000) 0 (40,000)
O
A Variable overhead (25,000) 0 I (25,000)
V Contribution Margin 65,000 0 D 65,000
O Depreciation (30,000) (30,000) A 0
I
D Supervisor salary (20,000) 0 B (20,000)
A Insurance (10,000) (10,000) L 0
B Airport fees ( 5,000) 0 E ( 5,000)
L Allocated overhead (10,000) (10,000) 0
E
Loss (10,000) (50,000) 40,000
The positive $40,000 differential amount reflects the fact that the
company is $40,000 better off by keeping the club.
14-53
 Add or Drop a Product
KEEP CLUB ELIMINATE DIFFERENTIAL
Sales $200,000 0 $200,000
Food/Beverage (70,000) 0 (70,000)
Personnel (40,000) 0 (40,000)
Variable overhead (25,000) 0 (25,000)
Contribution Margin 65,000 0 65,000
Avoidable fixed costs
Supervisor salary (20,000) 0 (20,000)
Airport fees ( 5,000) 0 ( 5,000)
Profit/Loss $ 40,000 $ 40,000

Worldwide airlines would also lose the contribution

margin of $65,000. The club contributes $40,000 to
Worldwide’s fixed costs.
14-54
 Conclusion
KEEP THE CLUB OPEN!

Contribution margin from

general airline operations
that will be forgone if club
is eliminated . . . . . . . . . . . $ 60,000 –0– $ 60,000
Profit/Loss $ 40,000 –0– $ 40,000
Monthly profit of
KEEPING the club open $100,000
The Opportunity Cost of =======
lost contribution margin is Worldwide is better off by
$60,000. $100,000 per month by
keeping its club open.
14-55
Decisions Involving Limited
Resources
•• Firms
Firms often
often face
face the
the problem
problem ofof
deciding
deciding how
how limited
limited resources
resources are
are
going
going to
to be
be used.
used.
•• Usually,
Usually, fixed
fixed costs
costs are
are not
not affected
affected by
by
this
this decision,
decision, so
so management
management can can
focus
focus on
on maximizing
maximizing total
total contribution
contribution
margin.
margin.

Let’s
Let’s look
look at
at the
the Martin,
Martin, Inc.
Inc. example.
example.
14-56
 Limited Resources
Martin, Inc. produces two products
and selected data are shown below:

Products
Webs Highs
Selling price per unit $ 60 $ 50
Less: variable expenses per unit 36 35
Contribution margin per unit $ 24 $ 15
Current demand per week (units) 2,000 2,200
Contribution margin ratio 40% 30%
Processing time required
on the lathe per unit 1.00 min. 0.50 min.

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 Limited Resources
•• The
The lathe
lathe is
is the
the scarce
scarce resource
resource because
because
there
there is
is excess
excess capacity
capacity onon other
other machines.
machines.
The
The lathe
lathe is
is being
being used
used atat 100%
100% ofof its
its
capacity.
capacity.
•• The
The lathe
lathe capacity
capacity isis 2,400
2,400 minutes
minutes perper week.
week.

Should
Should Martin
Martin focus
focus its
its efforts
efforts
on
on Webs
Webs oror Highs?
Highs?

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 Limited Resources
Let’s calculate the contribution margin per unit
of the scarce resource, the lathe.
Products
Webs Highs
Contribution margin per unit $ 24 $ 15
Time required to produce one
unit ÷ 1.00 min. ÷ 0.50 min.
Contribution margin per minute $ 24 min. $ 30 min.

Highs should be emphasized. It is the more valuable

use of the scarce resource, the lathe, yielding a
contribution margin of $30 per minute as opposed to
$24 per minute for the Webs.

14-59
 Limited Resources
Let’s see how this plan would work.
Allotting the Scarce Resource – The Lathe

Weekly demand for Highs 2,200 units

Time required per unit x .50 minutes
Time required to make Highs 1,100 minutes

Total lathe time available 2,400 minutes

Time used to produce Highs 1,100 minutes
Time available for Webs 1,300 minutes
Time required per unit x 1.00 minute
Production of Webs 1,300 units

14-60
 Limited Resources
According to the plan, Martin will produce
2,200 Highs and 1,300 Webs. Martin’s
contribution margin looks like this.

Webs Highs
Production and sales (units) 1,300 2,200
Contribution margin per unit $ 24 $ 15
Total contribution margin $ 31,200 $ 33,000

The total contribution margin for Martin, Inc. is $64,200.

Any other combination would result in less contribution.

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