Timmy N. runs a small shop that manufactures and sells battery testers and solenoid testers for quick,

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Timmy N. runs a small shop that manufactures and sells battery testers and solenoid testers for quick, easy use around the home. The following information related to these two products has been gathered from Timmy’s accounting records for the most recent year:


Timmy N. runs a small shop that manufactures and sells


Furthermore, the total unit cost of each product is calculated as follows:

Timmy N. runs a small shop that manufactures and sells


Both fixed manufacturing and fixed marketing and administrative costs are assigned to products based on the number of units sold. That is, Timmy’s accountant takes the total fixed costs incurred and divides them by the total number of units sold to arrive at a fixed cost per unit. Moreover, Timmy expects to incur $420,000 in total fixed costs each year regardless of production volume. Because Timmy’s shop produced 30,000 total units in the most recent year, each product was assigned $420,000/30,000 5 $14 per unit in fixed costs.

Required:
a. What was Timmy’s overall profit for the most recent year? What was Timmy’s reported profit for each product?
b. What was Timmy’s total contribution margin for the most recent year? What was Timmy’s contribution margin on each product?
c. Since the unit cost of the solenoid tester exceeds the unit price, Timmy believes that his business would be more profitable if he stopped producing solenoid testers. Is this true? By how much will Timmy’s profit increase or decrease if he stops producing and selling solenoid testers?
d. Based on your answers to parts (a) through (c), what inferences do you draw about the value of expressing fixed costs as the amount allocated per unit rather than the total of theexpenditure?

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Related Book For  book-img-for-question

Managerial accounting

ISBN: 978-0471467854

1st edition

Authors: ramji balakrishnan, k. s i varamakrishnan, Geoffrey b. sprin

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