Question

Refer to the information in QS 19-16. The company sells its product for \(50 per unit. Due to new regulations, the company must now incur \)2 per unit of hazardous waste disposal costs and $8,500 per year of fixed hazardous waste disposal costs. Compute the contribution margin per unit, including hazardous waste disposal costs.

Short answer

The contribution margin per unit is $39.

Step-by-step solution

Meaning of Contribution Margin

Contribution margin refers to the amount left with a business organization after recovering all the variable costs from its sales revenue. The contribution margin is computed by deducting variable expenses from revenues.

Computation of contribution margin per unit

$\begin{array}{rcl}\mathbf{\text{Contributionmargin}}& \mathbf{=}& \mathbf{\text{Sellingprice}}\mathbf{-}\mathbf{\text{Variablecost}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{50}\mathbf{-}\mathbf{\$}\\ & \mathbf{=}& \mathbf{\$}\mathbf{39}\end{array}$

Working note:

Computation of total variable cost:

$\begin{array}{rcl}\mathbf{\text{Totalvariablecost}}& \mathbf{=}& \mathbf{\text{Directlabor}}\mathbf{+}\mathbf{\text{Directmaterial}}\mathbf{+}\mathbf{\text{Variableoverhead}}\mathbf{}\mathbf{+}\mathbf{\text{Additionalcostforwastedisposal}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{+}\mathbf{\$}\mathbf{4}\mathbf{+}\mathbf{\$}\\ & \mathbf{=}& \mathbf{\$}\mathbf{11}\end{array}$