# Calculate Net Contribution?

Mercury Skateboard Company manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from Venus, Inc. Venus desires to market a skateboard similar to one of Mercury's and has offered to purchase 11,000 units if the order can be completed in three months. The cost data for Mercury's Champion model skateboard follow.

Direct material \$16.40

Direct labor: (.25 hour at \$18.00) 4.50

Total manufacturing overhead: (.5 machine hours at \$40.00) 20.00

Total \$40.90

The following additional information is available.

- The normal selling price of the Champion model is \$53.00; however, Venus has offered Mercury only \$31.50 because of the large quantity it is willing to purchase.

- Venus requires a modification of the design that will allow a \$4.20 reduction in direct-material cost.

- Mercury's production supervisor notes that the company will incur \$7,400 in additional setup costs and will have to purchase a \$4,800 special device to manufacture these units. The device will be discarded once the special order is completed.

- Total manufacturing overhead costs are applied to production at the rate of \$40 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of \$1,500,000 and planned production activity of 60,000 machine hours (5,000 per month).

- Mercury will allocate \$3,600 of existing fixed administrative costs to the order as "… part of the cost of doing business."

Calculate the net contribution margin.

Relevance

Sales (\$31.50 x 11000) \$346,500.00

Cost:

Direct materials (\$16.40 - \$4.20) \$12.20

Direct labor \$4.50

Variable manufacturing overhead ((60000 x \$40 - \$1500000) / 60000 x 0.5) \$7.50

Total \$24.20

Total variable manufacturing cost (\$24.50 x 11000) \$269,500.00

Total \$77,000.00

Less: Additional set - up costs \$7,400.00

Less: Purchase of device \$4,800.00

Net contribution margin \$64,800.00

Note: Exclude fixed cost in the analysis.

Source(s): My brain only.