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This is not the correct answer. Please see the correct answer for a complete explanation. We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.
The present contribution margin for crates is $3 per unit ($20 – 5 – 8 – 3 – 1). If the change is made, variable overhead applied will change as follows: Machine hours/unit currently required for Crates = 2 hours. Variable overhead currently applied per unit = $3. Therefore, the variable OH application rate is $1.50 per machine hour used ($3 ÷ 2). If the machine hours/unit are increased by 1-1/2 hours per unit, each unit will require 3.5 hours of machine time (2 hours presently + 1-1/2 hour increase). At an application rate of $1.50 per machine hour, 3.5 hours machine time per unit will result in $5.25 VOH being applied per unit (3.5 × $1.50). Now, we can calculate the contribution margin per unit for crates that would result from this change: Selling price $20.00 Direct materials (reduced by 50%) 2.50 Direct labor (unchanged) 8.00 Variable overhead applied 5.25 Variable selling costs (unchanged) 1.00 Contribution margin per unit $3.25 Since the current contribution margin per unit is $3.00, the contribution margin per unit will increase by $.25. 500,000 crates will be produced and sold. Therefore, the total increase in the contribution margin as a result of this change will be $.25 × 500,000, or $125,000.
This answer results from incorporating the decrease in direct materials costs but not the increase in the amount of variable overhead applied. The amount of variable overhead applied will increase because variable overhead is allocated based on machine hours, and the number of machine hours required per unit will increase.
This is not the correct answer. Please see the correct answer for a complete explanation. We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.