Question

Morning Dove Company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0–1,800 units, and monthly production costs for the production of 1,400 units follow. Morning Dove’s utilities and maintenance costs are mixed with the fixed components shown in parentheses.  

Production Costs	Total Cost
Direct materials	$	2,900
Direct labor		7,100
Utilities ($110 fixed)		570
Supervisor’s salary		2,600
Maintenance ($280 fixed)		500
Depreciation		900

Suppose it sells each birdbath for $24.

Required:

1. Calculate the unit contribution margin and contribution margin ratio for each birdbath sold.

2. Complete the contribution margin income statement assuming that Morning Dove produces and sells 1,600 units.

Answer 1

1 Morning Dove variable cost per unit

= (7,100 + 2,900 + 460 + 220) / 1,400 = $7.63

$220 is maintenance portion of utilities expenses (500 - 280)

Utilities expenses variable portion is $460 (570 - 110)

Morning Dove selling price is $24

Contribution margin per unit of Morning Dove

= 24 - 7.63 = $16.37

Contribution margin ratio

= (contribution margin per unit / selling price) × 100

= (16.37 / 24) × 100 = 68.20%

2    Morning Dove

     Contribution margin income statement

Particulars	$	$
Sales (1,600 × 24)		38,400
Variable cost
Direct material	3,314
Maintenance	320
Direct labour	8,114
Utilities	526
Less total variable costs		12,274
Contribution margin		26,126
Fixed costs:
Fixed utilities expense	110
Maintenance of fixed cost	320
Total utilities expenses		430
Net operating income		25,696

Direct material for 1,600 units

= (2,900 / 1,400) × 1,600 = $3,314

Maintenance for 1,600 units

= (280 / 1,400) × 1,600 = $320

1,600 units cost of utilities = (460 / 1,400) × 1,600 = $526

Direct labour 1,600 units

= (7,100 / 1,400) × 1,600 = $8,114

Maintenance cost for 1,600 units produced are $320.