Management Accounting: Financial Analysis and Profit Maximization

MANAGEMENT ACCOUNTING
STUDENT ID:
[Pick the date]

Question 1- ABC LIMITED
(a) An appropriate financial analysis would require computation of the contribution margin
for each of the two products which has been carried out below.
Particulars Standard Deluxe
Selling price per unit 70 120
(-) Direct material per unit 15 22
(-) Direct labour per unit 10 30
(-) Variable manufacturing overhead per unit 10 20
Contribution margin 35 48
The variable manufacturing overhead per unit has been computed by subtracting the fixed
manufacturing overhead per unit at $ 20 per machine hour. Since for each standard unit, one
machine hour is required, hence variable overhead cost = 30-20 = $ 10. On the other hand,
for each deluxe unit, two machine hours are required, hence variable overhead cost = 60-
(20*2) = $ 20
Based on the above financial analysis, it is apparent that unit contribution margin for
Standard and Deluxe model are $ 35 and $ 48 respectively and hence the Deluxe model is
able to generate a higher profit in comparison to Standard model (Drury, 2016).
(b) It is apparent that in the month of June, the total machine hours available are 60,000.
Given that the constraint is machine hours, hence the model which generates higher profit per
unit machine hour would be preferred (Damodaran, 2015).
Contribution margin of Standard Model = $ 35
Number of machine hours required for each unit of Standard Model = 1 hour
Hence, contribution margin per machine hour for standard model = 35/1 = $ 35
Contribution margin of Deluxe Model = $ 48
Number of machine hours required for each unit of Deluxe Model = 2 hour
Hence, contribution margin per machine hour for Deluxe model = 48/2 = $ 24
From the above computation, it is apparent that the standard model ought to be preferred.