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It seems important to calculate contribution margin of every product in order to determine first their profitability and second their ability to cover their fixed costs.
It is important to mention that the preliminary management's conclusion regarding abandoning the production of touring model and focus on the production of competition model is based on a weak product profitability analysis. This analysis shows certain concepts and cost allocation criteria that are not correct.
In order to determine the contribution margin of each product, it is necessary to separate the fixed cost portions that are included in the Manufacturing Overhead ($168,000) and in Selling and Administration Expenses ($ 162,000), the remaining amount represents variable costs...
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