Assuming no direct factory overhead costs (i.e., inventory carry costs) and $3 million dollars in combined promotion and sales budget, the Bold product manager wishes to achieve a product contribution margin of 35%. Given their product currently is priced at $35.00, what would they need to limit the material and labor costs to?

Since the product contribution margin is 35%, that means that the difference between the selling price and the variable costs must equal 35% of selling price.

contribution margin = selling price - variable costs

(35% x $35) = $35 - V

$12.25 = $35 - V

V = $35 - $12.25

V = $22.75

So the variable costs (including materials and labor) is $22.75 per unit.

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suchetasVT suchetasVT · Answer 2 · 2022-03-16T09:16:39+01:00

Contribution margin can be calculated on the basis of the amount or per unit. It represents the rising cost generated by each product/unit sold after deducting a variable portion of firm costs.

What is the formula of Contribution margin?

The contribution margin is expressed as the difference between the selling price of a product and the variable costs associated with its production and sales process.

[tex]\rm\,Contribution\,margin = Selling\,price - Variable\,cost[/tex]

The contribution of 35% indicates the difference between the selling price of a product and the variable costs is equal to 35%.

This implies

[tex]\rm\,35\% = 35 - VC\\\\\\35\%\,of\,35 = 35 - VC\\\\ 12.25 = 35 - VC\\\\VC = 35 - 12.25\\\\VC =\$ 22.75[/tex]

Hence, the company should limit its material and labor costs to $22.75 per unit.

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