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 500each.Thecompanyhasa25500 each. The company has a 25% income tax rate.

Variable production costsFixed manufacturing costsPlastic for casing$ 17,000Taxes on factory$ 5,000Wages of assembly workers82,000Factory maintenance10,000Drum stands26,000Factory machinery depreciation40,000Variable selling costsFixed selling and administrative costsSales commissions15,000Lease of equipment for sales staff10,000Accounting staff salaries35,000Administrative management salaries125,000\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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Sirhuds Inc., a maker of smartwatches, reports the information below on its product. The company uses absorption costing and has a target markup of 40% of absorption cost per unit. Compute the target selling price per unit under absorption costing.

Direct materials cost$100 per unitDirect labor cost$30 per unitVariable overhead cost$8 per unitFixed overhead cost$600,000 per yearVariable selling and administrative expenses$3 per unitFixed selling and administrative expenses$120,000 per yearExpected production (and sales)50,000 units per year\begin{matrix} \text{Direct materials cost} \ldots\ldots\ldots & \text{\$100 per unit}\\ \text{Direct labor cost}\ldots\ldots\ldots & \text{\$30 per unit}\\ \text{Variable overhead cost} \ldots\ldots\ldots & \text{\$8 per unit}\\ \text{Fixed overhead cost} \ldots\ldots\ldots & \text{\$600,000 per year}\\ \text{Variable selling and administrative expenses}\ldots\ldots\ldots & \text{\$3 per unit}\\ \text{Fixed selling and administrative expenses} \ldots\ldots\ldots & \text{\$120,000 per year}\\ \text{Expected production (and sales)}\ldots\ldots\ldots & \text{50,000 units per year}\\ \end{matrix}