Initial Cost Calculation: Initially, the product’s cost includes labor ($10), overhead ($12.50), and materials ($14). Thus, the total cost is $36.50 per unit.

Cost Reduction: Supply management reduces the cost of materials from $14 to $12, decreasing the total cost per unit to $34.50.

Contribution to Profit: The reduction in cost directly translates to an increase in profit per unit. The cost reduction is $2 per unit ($14 - $12).

Profit Calculation: As the selling price remains $36.50, the new profit per unit after cost reduction is the selling price minus the new total cost ($36.50 - $34.50), which results in an increased profit of $2 per unit.

References

ISM Glossary of Key Supply Management Terms

CIPS Cost Management Tools and Techniques