BAB240 – Management Accounting – Assignment #4 Professor Edabul Islam Christine Chan 1
BAB240 – Management Accounting – Assignment #4
Professor Edabul Islam
1. Yes, if the price of processing salsa stays at $7.80, the company should discontinue the operation. However, I do not agree with the sales manager as the price of $7.90 still yields a lower contribution margin of $1.00 (from only producing unprocessed tomatoes). The company could generate a higher contribution margin if resources and capacity are allocated to the production of unprocessed tomatoes. The contribution margin that can be generated from producing another kilogram of unprocessed tomatoes is higher than the contribution margin that can be generated from the production of another kilogram of salsa. The calculation is as follows:
Selling price per kg of tomatoes
Less: Variable Manufacturing Cost ($4.90 materials & $0.25 direct labour)
Contribution Margin per kg of tomatoes
Revenue generated from processing tomatoes into salsa ($7.80-$6.15)
Less: Costs associated with further processing ($1.00 materials & $0.25 direct labour)
Contribution Margin per kg of salsa
At $7.90, the contribution margin would increase to $0.50 but it is still not as high as the $1.00 contribution margin from only producing unprocessed tomatoes.
As for the overhead costs, they can be deemed as non relevant as they are fixed and will remain constant ($0.75 for both operations) whether the resources are devoted to producing salsa or producing unprocessed tomatoes.
Since the contribution margin to produce unprocessed tomatoes is $1.00 vs. $0.40 if both processing of tomatoes and salsa takes place, the company makes more profit by allocating its labour and manufacturing capacity in only producing unprocessed tomatoes.
2. The data shows the direct labour and manufacturing cost of both operations is the same, which means the company should only continue salsa operations if the contribution margin is the same as producing unprocessed tomatoes. The lowest price of salsa that should be accepted is $8.40. At this price, the contribution margin ($1.00) matches that of producing unprocessed tomatoes. At this price, the company has a choice in producing only unprocessed tomatoes or producing unprocessed tomatoes and further processing of salsa as it yields the same contribution margin. The calculation is as follows:
$1.00 = contribution margin of per kg of tomatoes
$8.40 – 6.15 (selling price of tomatoes) – 1.25 (further processing of salsa cost) = $1.00