Xenon Corporation makes a number of industrial products. Xenon estimates annual factory overhead at $1,500,000, materials cost at $600,000, and labor cost at $1,000,000. In addition, Xenon considers one-third of its overhead to be variable, as these costs pertain to items such as supplies, oils, and lubricants. Xenon uses direct labor cost to allocate manufacturing overhead to products. One of Xenon’s products, a pump, requires $12 in materials and $30 in labor. Each pump sells for $90.

Required:
a. Determine the contribution margin per pump. Assume that pumps do not incur any variable selling and administrative costs.
b. Determine the gross margin per pump.
c. Suppose Xenon analyzes its fixed overhead and determines that $240,000 relates to materials and the remainder relates to labor-related expenses. Xenon allocates materials-related fixed overhead using materials cost as the allocation basis and labor-related fixed overhead using labor cost as the allocation basis. As before, Xenon allocates variable overhead using labor cost as the allocation basis. Determine the gross margin per pump.
d. Why is the gross margin in (c) higher than the gross margin in (b)?