Posted: April 11th, 2016

Which model has the greatest contribution margin per unit?

1) Southwestern Company needs 1000 motors in its manufacture of automobiles. It can buy the motors from Jinx Motors for $1250 each.

Southwestern’s plant can manufacture the motors for the following costs per unit:
Direct materials-$500
Direct manufacturing labor- $250
Variable manufacturing overhead- $200
Fixed manufacturing overhead- $350
Total- $1300

If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied will not be avoided.

a) Should the company make or buy the motors? Show calculations.
b) What additional factors should Southwestern consider in deciding whether or not to make or buy the motors?

2) Braun’s Brakes manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models.

The following per unit data apply:
Selling price: $50 for X, $60 for Y, $70 for Z
Direct materials: 6 for all
Direct labor ($12 per hour): 12 for X and Y, and 24 for Z
Variable support costs ($4 per machine hour): 4 for X, and 8 for Y and Z
Fixed support costs: 10 for all

a) Which model has the greatest contribution margin per unit?
b) Which model has the greatest contribution margin per machine hour?
c) If there is excess capacity, which model is the most profitable to produce? Why?

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