European International has 3 separate business units in the following countries. Data for each of the business units is given below:$\begin{array}{|l|l|l|l|}
\hline&\text { France } & 5 p \mathrm{a} i n & \text { italy }\
\hline \text { Selling price per unit } & £ 35 & £ 38 & £ 42 \
\hline \text { Manufacturing cost } & £ 4,000 \text { per month plus } £ 17 \text { per } & £ 3,500 \text { per month plus } £ 18 \text { per } & £ 5,000 \text { per month plus } £ 20 \text { per } \
& \text { unit } & \text { unit } & \text { unit } \
\hline \text { Administrative } & £ 2,500 \text { per month plus } £ 2.50 & £ 2,900 \text { per month plus } £ 2.90 & £ 3,500 \text { per month plus } £ 3.50 \
\text { expense } & \text { per unit } & \text { per unit } & \text { per unit } \
\hline \text { Sales commissions } & 15 \% \text { of sales } & 16 \% \text { of sales } & 20 \% \text { of sales } \
\hline \text { Advertising expense } & £ 2,000 \text { per month } & £ 3,000 \text { per month } & £ 2,000 \text { per month }\
\hline
\end{array}$
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If the business unit in Italy plans to produce sell 3,000 units next month, the expected contribution margin would be
A)£34,750.
B)£30,300.
C)£26,500.
D)£56,250.

Question

European International has 3 separate business units in the following countries. Data for each of the business units is given below:$\begin{array}{|l|l|l|l|}
\hline&\text { France } & 5 p \mathrm{a} i n & \text { italy }\
\hline \text { Selling price per unit } & £ 35 & £ 38 & £ 42 \
\hline \text { Manufacturing cost } & £ 4,000 \text { per month plus } £ 17 \text { per } & £ 3,500 \text { per month plus } £ 18 \text { per } & £ 5,000 \text { per month plus } £ 20 \text { per } \
& \text { unit } & \text { unit } & \text { unit } \
\hline \text { Administrative } & £ 2,500 \text { per month plus } £ 2.50 & £ 2,900 \text { per month plus } £ 2.90 & £ 3,500 \text { per month plus } £ 3.50 \
\text { expense } & \text { per unit } & \text { per unit } & \text { per unit } \
\hline \text { Sales commissions } & 15 \% \text { of sales } & 16 \% \text { of sales } & 20 \% \text { of sales } \
\hline \text { Advertising expense } & £ 2,000 \text { per month } & £ 3,000 \text { per month } & £ 2,000 \text { per month }\
\hline
\end{array}$ 
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If the business unit in Italy plans to produce sell 3,000 units next month, the expected contribution margin would be
A)£34,750.
B)£30,300.
C)£26,500.
D)£56,250.

Quizplus · Accepted Answer

Contribution margin = Selling price per unit - Variable costs per unit

Variable costs per unit = Manufacturing cost per unit + Administrative expense per unit + Sales commissions per unit

For the business unit in Italy:
Manufacturing cost per unit = £5,000/3,000 = £1.67
Administrative expense per unit = (£3.50 x 3,000 + £3,500)/3,000 = £4.17
Sales commissions per unit = 20% x £42 = £8.40

Variable costs per unit = £1.67 + £4.17 + £8.40 = £14.24
Contribution margin = £42 - £14.24 = £27.76
Total contribution margin = 3,000 x £27.76 = £83,280
Fixed costs = Manufacturing cost (£5,000) + Administrative expense (£3,500) + Advertising expense (£2,000) = £10,500
Profit = Total contribution margin - Fixed costs = £83,280 - £10,500 = £72,780

Therefore, the expected contribution margin for the business unit in Italy would be £30,300 (not £34,750 or £26,500 or £56,250). Option B is the correct answer.

European International Has 3 Separate Business Units in the Following