Question

A company has four products in the range A, B, C and D. Sales volume (piece), price and direct costs per piece (NOK/piece) in the last year for the four products are given in the table:

product A B C D
seliing price(NOK/piece) 10000 11000 8000 9000
direct material (NOK/piece) 1600 1700 1200 1400
direct salary (nok/piece) 1500 1800 1200 1500
other direct manufacturing 200 100 100 200
(nok/piece)
sales commission 1000 1100 800 900
(NOK/piece)

Additional rates based on last year's indirect costs

- Indirect fixed costs material dept. (MOF) : 20%
- Indirect fixed costs production dept. (TOF) : 156%
- Indirect variable costs production dept. (TOV) : 25%
- Indirect fixed selling and administrative costs (S&AOF) : 35%
-Which product is the most profitable to sell, i.e. makes the maximum contribution to the profit per piece?

Product A, B, C or D?

Answer 1

Product B is the most profitable for the company, with a contribution margin of 6300 NOK/piece.

Step-by-step explanation:

To determine which product is the most profitable for a company, we must calculate the contribution margin per piece for each product. The contribution margin is found by subtracting the sum of direct materials, direct salary, other direct manufacturing costs, and sales commission from the selling price. We will not factor in indirect costs as these are not attributed to individual pieces but rather to overall production.

Let's do the calculation for each product:

• 
  
• Product A: Contribution margin = 10000 - (1600 + 1500 + 200 + 1000) = 5700 NOK/piece
• 
  
• Product B: Contribution margin = 11000 - (1700 + 1800 + 100 + 1100) = 6300 NOK/piece
• 
  
• Product C: Contribution margin = 8000 - (1200 + 1200 + 100 + 800) = 4700 NOK/piece
• 
  
• Product D: Contribution margin = 9000 - (1400 + 1500 + 200 + 900) = 5000 NOK/piece

Thus, Product B is the most profitable to sell as it makes the maximum contribution to the profit per piece at 6300 NOK/piece.