CASE : BANNER MANUFACTURING INC.

After discovering the cost behavior for the Banner Company, you remembered that your planning, control and decision making tasks would become much easier if you convert the conventional (full costing) income statement to a contribution margin (variable costing) income statement.

In other words, with a well prepared contribution margin income statement you can easily :

1- determine the profitability of different products for a short or a long range period,

2- determine the performance of different departments as well as the company as a whole,

3- apply break-even analysis,

4- exercise resource allocation effectively through the Linear Programming model, and

5- etc.

ASSUMPTIONS

Assuming you discovered the following cost equations in case 2:

Advertising Cost y = 0.10 (Gross Sales)

Discount Y= 0.01 (Gross Sales)

OH Y= 100.000 + 0.40 (Direct Labor Cost X) + 0.40 (Direct Labot Cost Y)

OR: OH = 100,000 + 8 (unit X) + 10 (unit Y)

Salary & Commission = 100,000 + 0.04 (Gross Sales)

Bad Debt = 0.04 (Greoss Sales)

Purchasing Expense =4000 + 0.025 Drict Material Cost

REQUIREMENTS

1- Compute Unit contribution margin for product X and Y individually Also compute contribution margin ratio for each product and for total sales

2- Determine the break-even-point for the Company by using the same sales mix as the previous year.

3- If there is no sales (market) limitation, which of the two products, X or Y, is more profitable for the company to produce and sell ?