Question

Assuming no direct factory overhead costs (i.e., inventory carry costs) and $3 million dollars in combined promotion and sales budget, the Deal product manager wishes to achieve a product contribution margin of 35%. Given their product currently is priced at $35.00, what would they need to limit the material and labor costs to?

Answer 1

Explanation:

Given that we assume no direct factory overhead costs (i.e., inventory carry costs) and $3 million dollars in combined promotion and sales budget, the Deal product manager wishes to achieve a product contribution margin of 35%.

Sales - variable cost = Fixed cost + profit

Here fixed cost = 3 million dollars

Sales - variable = contribution = 35%

35% should atleast meet the fixed cost

i.e. 35% = 3 million

100% = 8.57 million can be cost

Since fixed cost will not change and remain 3 million these 5,57 million can be given to material and labor costs

So material and labor cost should be limited upto 5.57 million increase.