The new plant manager has lots of ideas for change. His bonus is tied directly to plant profit, and last month he had the accounting department change from absorption costing to variable costing, as he heard at a meeting that contribution margin was usually higher than gross margin. This month, he wants to change to throughput costing, in hopes that throughput contribution will be greater than contribution margin. The relevant data are: Sales $150,000; opening inventory $2,500; variable cost of goods manufactured $24,000; ending inventory using variable costing $8,000; variable marketing cost $15,200; and, there are no variable cost variances. The above numbers are the same for throughput costing except as follows: direct materials in goods manufactured $13,200; and, ending inventory $4,400.
Required:
a. Calculate the contribution margin and throughput margin.
b. Does this appear to be a sensible strategy by the plant manager?

Question

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The Answer of The new plant manager has lots of ideas for change. His bonus is tied directly to plant profit, and last month he had the accounting department change from absorption costing to variable costing, as he heard at a meeting that contribution margin was usually higher than gross margin. This month, he wants to change to throughput costing, in hopes that throughput contribution will be greater than contribution margin. The relevant data are: Sales $150,000; opening inventory $2,500; variable cost of goods manufactured $24,000; ending inventory using variable costing $8,000; variable marketing cost $15,200; and, there are no variable cost variances. The above numbers are the same for throughput costing except as follows: direct materials in goods manufactured $13,200; and, ending inventory $4,400.
Required:
a. Calculate the contribution margin and throughput margin.
b. Does this appear to be a sensible strategy by the plant manager?

The New Plant Manager Has Lots of Ideas for Change