Assuming no direct factory overhead costs (i.e., inventory carry costs) and $3 million dollars in combined promotion and sales budget, the Bit product manager wishes to achieve a product contribution margin of 35%. Given their product currently is priced at $35.00, what would they need to limit the material and labor costs to?

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DeniceSandidge DeniceSandidge · Answer 1 · 2019-12-22T07:10:40+01:00

Answer:

they need to limit the material and labor costs to $22.75

Explanation:

given data

combined promotion = $3 million

contribution margin ratio = 35%

Selling price = $35 per unit

to find out

what would they need to limit the material and labor costs to

solution

we get here Contribution margin per unit that is express as

Contribution margin per unit = $35 × 35%

Contribution margin per unit = $12.25 per unit

and Variable cost will be

Variable cost = $35 - $12.25

Variable cost = $22.75 per unit

and we know Variable cost is also express as

Variable cost = Direct materials costs + Direct labor costs + Direct factory overheads ..............1

here direct factory overheads is 0 and Direct materials costs + Direct labor costs is $22.75

so put in equation 1

Variable cost = $22.75 + 0 = $22.75

so we can say that they need to limit the material and labor costs to $22.75