Exam 10: Differential Analysis and Product Pricing

Under the total cost concept, manufacturing cost plus desired profit is included in the total cost per unit.

The lowest contribution margin per scarce resource is the most profitable.

Lockrite Security Company manufacturers home alarms. Currently, it is manufacturing one of its components at a total cost of $45 which includes fixed costs of $15 per unit. An outside provider of this component has offered to sell Lockrite the component for $40. Provide a differential analysis of the outside purchase proposal.

What cost concept used in applying the cost-plus approach to product pricing covers selling expenses, administrative expenses, and desired profit in the markup?

Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32, respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales, 7 hours; and Wales 1 hour. Assuming that Widgeon Co. can sell all of the products it can make, what is the maximum contribution margin it can earn per month?