Last year, fixed overhead costs attributable to the traffic paint totaled $85,000, including an estimated $25,000 of costs directly associated with the Virginia contract; the $25,000 can be eliminated in approximately two years. Fixed overhead costs attributable to the commercial paint are $13,000.
Other manufacturing overhead costs total $110,000. Charlie estimates that $40,000 of this amount is inventory handling costs that will be avoided due to the loss of the Virginia contract. Both the remaining manufacturing overhead and the general and administrative costs of $140,000 are allocated equally to all gallons of paint produced.
1. Calculate the contribution margin for each type of paint and total firm wide contribution under each of the following scenarios: