Question

# The following costs result from the production and sale of 1,000 drum sets manufactured by Tight Drums Company for the year ended December 31, 2017. The drum sets sell for $500 each. The company has a 25% income tax rate.$$\begin{matrix} \text{Variable production costs} & \quad & \text{Fixed manufacturing costs}\\ \text{Plastic for casing}\ldots\ldots\ldots & \text{\ 17,000} & \text{Taxes on factory} \ldots\ldots\ldots & \text{\ 5,000}\\ \text{Wages of assembly workers} \ldots\ldots\ldots & \text{82,000} & \text{Factory maintenance}\ldots\ldots\ldots & \text{10,000}\\ \text{Drum stands} \ldots\ldots\ldots & \text{26,000} & \text{Factory machinery depreciation}\ldots\ldots\ldots & \text{40,000}\\ \text{Variable selling costs} & \quad & \text{Fixed selling and administrative costs}\\ \text{Sales commissions} \ldots\ldots\ldots & \text{15,000} & \text{Lease of equipment for sales staff} \ldots\ldots\ldots & \text{10,000}\\ \quad & \quad & \text{Accounting staff salaries}\ldots\ldots\ldots & \text{35,000}\\ \quad & \quad & \text{Administrative management salaries} \ldots\ldots\ldots & \text{125,000}\\ \end{matrix}$\$ 1. Prepare a contribution margin income statement for the company. 2. Compute its contribution margin per unit and its contribution margin ratio. 3. Interpret the contribution margin and contribution margin ratio from part 2.

Solution

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For this problem, we are going to prepare a contribution margin income statement and we're going to compute for contribution margin ratio.

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