The contribution margin has been calculated for all the three products of the company based on a per units basis, per dollar basis and per capacity basis where labor hours per unit are taken as the capacity basis. Contribution is the difference between the sales price of the product and the variable costs of the products. Among all the three Hilton’s products the product 101 has the highest contribution margin of 4.60 per units, 49% and 198% on all the three basis respectively. The total contribution is the factor which is used here to decide which the most profitable product of the company is.
The management of Hilton Manufacturing first of all needs to make sure that dropping the product 103 does not means in any sense that the sales of the other two products will increase. On the other hand, the fixed costs of the company would also remain constant and they would then be distributed among the two products only (101 and 102). If the company drops the product 103, it will have a negative effect on the contribution margin of the company and the company will have lower margins to handle the amount of fixed costs of the company. The calculations performed in the spreadsheet show that if the company drops the product 103, the profit for the company will turn into loss. Although it is negative currently also, but after dropping 103, the loss would increase by huge proportion because of the fixed costs which are constant. Apart from this if product 103 is currently unprofitable, it still would be absorbing some of the fixed costs of the company. Therefore, the management should not drop the product 103.
The company has two options, it could reduce the price of the product to $ 8.64 cwt with the sales units of 1000000 to gain a competitive advantage in the industry or it could still maintain the same price of $ 9.41 with a unit sales level of 750000, under which also the company could come up with new value proposition to attack its competitors. The company can for example, introduce a technology to reduce the variable costs of the products. However, the calculations have been performed under both the prices and the contribution margin has been calculated for this product. The 5% increase in the prices of the materials and supplies has also been incorporated and the sales level has also been changed. Based on the results, the contribution margin under the new price is higher by $ 1509200. This is a huge increase in the contribution and the profit for the whole company would also improve. Therefore, the management of Hilton manufacturing company should reduce the price of the product 101.
The previous contribution margin of 4.60 per unit for product 101 was based on a units level of 996859. However, if the price of the product has been reduced to $ 8.64, then the new unit level can be calculated which would give the same contribution margin for product 101. The calculation has been performed in the spreadsheet and this new units level is 991606 units. Looking at the difference in the units, and the higher contribution margin of this product, the company should reduce its price to $ 8.64 cwt…………………..
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Professional manager hires a small manufacturing company after the president finds that he made the wrong decision. One product is a loss, while the product is being sold at a high volume is pressurized competitive price. Crude cost accounting system can not identify the appropriate measures to resolve the problem. “Hide
by William J. Bruns Jr. Source: Harvard Business School 6 pages. Publication Date: October 11, 1991. Prod. #: 192063-PDF-ENG
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