Excercise – Contribution Analysis

Contribution Analysis

Boreland Toys is a two year old toy company that primarily makes wagons for children, but has recently considered using its set up to fill spur of moment orders for shop wagons and perhaps wheel barrows. The firm boasts a dedicated workforce that readily contributes ideas in company forums.

  • (a) Identifying previously unkown costs
  • (b) Assisting in categorizing costs
  • (c) Guidance in setting a prices for totally new projects
  • (d) All of the above

(4) True or False, generally speaking Contribution Analysis identifies overhead costs by accounting for all known fixed, direct and variable costs and then subtracting that amount from revenues.

Management plans to use input from factory stewards and machine operators combined plus some accounting principles to reveal a price with profit potential. The company profit margins have been slim, though production has experienced steady growth profits have stagnated. The company thinks better accounting might have lead to the level of pricing which would have generated a profit.

Despite its past mistakes Boreland is intrigued about a proposal from Conner Industries to purchase a large order of tool wagons. Boreland is unsure of what price to charge for wagons supplied to Conner, there is the potential to shift production processes for the new order but not make a profit due to a poor handle on costs of production.

Answer the following questions to demonstrate an understanding of Contribution Analysis and its application.

(1) Boreland should employ which of the following accounting principles?

  • (a) Restitution Calibration
  • (b) Transactional Analysis
  • (c) Constitutional Analysis
  • (d) Contribution Analysis  

(2) To calculate a products contribution to profits, Boreland will need to assemble which of the following data?

  • (a) Number of units sold
  • (b) Contribution margin per unit
  • (c) Price records
  • (d) Variable costs per unit
  • (e) All of the above

(3) Which of the following are potential benefits Boreland might realize as a result of      employing a Contribution Analysis?