30PGB - Horngren'S Financial And Managerial Accounting

Question

Brik, located in San Antonio, Texas, produces two lines of electric toothbrushes: deluxe and standard. Because Brik can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:

                                                                                Per Unit 

                                                  Deluxe Toothbrush          Standard Toothbrush 

Sales price                                          \(88                                   \)54

Variable expense                                 22                                    18                          

Contribution margin                            \(66                                   \)36     

Contribution margin ratio                    75.0%                               66.7%

 

After expansion, the factory will have a production capacity of 4,900 machine hours per month. The plant can manufacture 65 standard electric toothbrushes or 27 deluxe electric toothbrushes per machine hour. 

Requirements 

1. Identify the constraining factor for Brik. 

2. Prepare an analysis to show which product line the company should emphasize.

Step-by-Step Solution

Answer

The company should emphasize standard toothbrushes.

Step 1: Meaning of Contribution Margin Ratio

The contribution margin ratio is the mathematical representation of the contribution margin generated by a business entity. It is presented in percentage form and is computed by dividing the net sales by the contribution margin.

Step 2: Identification of constraining factor

As per the given information, the constraining factor for Brik is machine hours. After expansion, the factory will have a production capacity of 4,900 machine hours per month.

Step 3: Preparation of analysis

Particulars	Deluxe Toothbrush ($)	Standard Toothbrush ($)
Contribution margin per unit (A)	66	36
Units produced per machine hour (B)	27	65
Contribution margin per machine hour (A*B)	$1,782	$2,340

 

Comment:

The company should produce more units of standard toothbrushes because it provides a higher contribution margin per machine hour.