Question

T&J manufacturing has a factory that produces custom kitchen cabinets. It has multiple product lines. Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs. The materials include $1,000 for the wood and other direct materials of $200. Both items listed are on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 65%. The company estimates that it will have 16,000 direct labor hours in total for all product lines. It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows: Salaries- office & administrative $ 520,000 Salaries for factory personal: $ 220,000 Office Rent $ 125,000 Factory Rent $ 20,000 Office Utilities and Misc office expenses(based on units sold) $ 20,000 Sales Travel(based on units sold) $ 24,000 Insurance - office $ 12,000 Depreciation - office equipment $ 40,000 Depreciation for factory equipment $ 70,000 Advertising $ 20,000 Sales commissions(based on units sold) $ 45,000 Factory Property taxes: $ 10,000 Maintenance for factory equipment: $ 80,000

4. What is the Contribution Margin (CM) in total dollars, CM% and per unit for the sale of 800 kitchen cabinets? Explain the importance of CM and how it can be used by companies to predict future income. Create some examples with numbers to show how it can be used.

SHOW WORK please!

Answer 1

Calculation of total cost
Material Cost		Total cost for 800 Units	per unit= total cost /800
Wood		800000	v	1000
Other direct materials		160000	v	200
Direct Labour	800*20*10	160000	v	200
salaries office and admin		520000	f	650
salaries factory personnel		220000	f	275
factory rent		20000	f	25
office rent		125000	f	156.25
office utilities & Misc. office expenses		20000	v	25
sales travel based		24000	v	30
insurance office		12000	f	15
depreciation office equipment		40000	f	50
depreciation factory equipment		70000	f	87.5
advertisement		20000	f	25
sales commission		45000	v	56.25
factory property taxes		10000	f	12.5
maintenance factory equipment		80000	f	100
		2326000		2907.5
calculation of Sales price at markup of 65%
( 65%*total cost/100)+total cost		3837900		4797.375
Variable costs
Material Cost		total		per unit=total /800
Wood		800000	v	1000
Other direct materials		160000	v	200
Direct Labour	800*20*10	160000	v	200
office utilities & Misc. office expenses		20000	v	25
sales travel based		24000	v	30
sales commission		45000	v	56.25
total		12,09,000		1,511
sales price		38,37,900		4,797
contribution = sales -variable cost		26,28,900		3,286
contribution margin		68.50		68.50

Importance of Contribution Margin and Use

A contribution margin is important because it shows how much money is available to pay the fixed costs such as rent and utilities, that must be paid even when production or output is zero.

The contribution margin helps to separate out the fixed cost and profit components coming from product sales and can be used to determine the selling price range of a product, the profit levels that can be expected from the sales, and structure sales commissions paid to sales team members, distributors or commission agents.

Example of Contribution Margin

suppose unit sales price is $1000 and Variable cost is $150

therefore contribution margin is 1000-150= 850

in % 850/1000=0.85 or 85%

85% of sales can move on to cover fixed costs or become company profits.

this information can be used at managerial level as how to best use this money for these purposes. By having effective financial ratios, doors open which can lead to further growth of the company as a whole.