Contribution

1. What is contribution?

2. What is total contribution?

3. What are its uses?

4. Scenario: South Hams Brewery produces its beer at a variable

cost of 1.50 a pint and sells it for 2.00 per pint.
a) What is the contribution per unit? Show workings!

5. Scenario: South Hams Brewery sells 70,000 pints each month

at the above price.
a) What is the total contribution? Show workings!

b) Using the details above, if fixed costs are 25,000, what is the
profit generated by these sales? Show workings!

Contribution: Special Order Decisions

6. What is a special order?

7. Scenario: A firm sells product A for 33. VC are 20 and FC are

6,000. The firm has received a special order for its product of
100 units at 25 per item. Should the firm accept the order? Why?

8. Scenario: Another firm sells a product product B for 57. VC

are 44 and FC are 9,600. The firm has received a special order
for 80 items at 40 per unit. Should the firm accept the offer?
Why?

9. Units of output:
Production capacity:
Usual selling price:
FC:
VC:

12,000 per annum

16,000 per annum
125 per unit
50,000
100 per unit

The firm is approached by a potential customer that wishes to buy

2000 units. The price offered is 10% lower than usual selling price.
Furthermore, modifications need to be made to raw materials used
and production methods employed. These changes will add 10%
to VC and increase FC by 7000. Should the offer be accepted?
Why?

10. Using the same initial scenario as above, the firm is

approached by another potential customer with another order. The
financial data relating to the order is as follows:
-

order of 4000 units

price offered is 5% lower than usual
VC increased by 3%
FC rise by 3,000.00

Should the order be accepted?

11. Dizzy Ltd

Dizzy Ltd sell three products in the UK Market. It has been
approached by three different firms with special order offers:
Firm X is based in Germany and has had no previous contact with
Dizzy Ltd. It has offered Dizzy a fixed price of 38 for 200 units of
product A.
Firm Y regularly buys product B on a small scale. It wishes to buy
450 items at a fixed price of 22.
Firm Z is a company that has regularly purchased items from Dizzy
Ltds main competitor. The competitor has experienced difficulties
in supplying Firm Z which is desperate to find alternative supplies.
Product C is the closest substitute to the competitors product.
Firm Z has offered 23 per unit in return for a set order of 300
items on a take it or leave it basis.

Product A
Product B
Product C

Selling
Price
( per
unit)
50
30
20

Variable
Costs
( per
unit)
22
19
10

Fixed
Costs
( per
unit)
8,400
5,500
5,000

Current
Output
(units)

Max
Capacity
(units)

650
450
700

900
900
900

Based on quantitative and qualitative factors, advise Dizzy Ltd on

whether it should accept the order from Firms X, Y and Z. Justify
your recommendations in each case.