Sample Homework Question no.5

Course: Accounting
Level: N/A

Question:

The key to the efficient utilization of a scarce resource is the contribution margin per unit of the constraint resource. What does this statement mean? Provide examples in your discussion.

Answer:

The statement “The key to the efficient utilization of a scarce resource is the contribution margin per unit of the constraint resource” means that for any scarce resources its contribution margin is a key factor which signifies whether the particular resource is utilized effectively in terms of cost and operations in the organization.

Contribution Margin of the scarce resource is calculated as under:
Selling price per unit              xxx
Less: Variable cost per unit    xxx
Contribution Margin                xxx

Example:
Selling price per unit of a scarce resource is $40. Variable cost is assumed as $25, in that case:
Contribution margin per unit = $40 - $25 = $15 per units

If suppose due to effective utilization of the scarce resource the variable cost comes down to $20, then its contribution margin will be = $40 - $20 = $20.

So, the contribution margin has increased and it will lead to an increase in net income and reduction in the break-even level of sales.

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