Question

In: Accounting

The following costs result from the production and sale of 4,600 drum sets manufactured by Tight...

The following costs result from the production and sale of 4,600 drum sets manufactured by Tight Drums Company for the year ended December 31, 2017. The drum sets sell for $310 each. The company has a 25% income tax rate.

  

Variable production costs
Plastic for casing $ 133,400
Wages of assembly workers 432,400
Drum stands 174,800
Variable selling costs
Sales commissions 124,200
Fixed manufacturing costs
Taxes on factory 9,000
Factory maintenance 18,000
Factory machinery depreciation 78,000
Fixed selling and administrative costs
Lease of equipment for sales staff 18,000
Accounting staff salaries 68,000
Administrative management salaries 148,000


Required:

1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.

Solutions

Expert Solution

Answer 1 :

Tight Drums Company

Contribution Margin Income Statement

For the Year Ended December 31, 2017

Sales (4,600 drum sets * $310 ) $1,426,000
Variable costs :
Plastic for casing 133,400
Wages of assembly workers 432,400
Drum stands 174,800
Sales commissions 124,200
Total variable costs 864,800
Contribution margin 561,200
Fixed costs :
Taxes on factory
9,000
Factory maintenance 18,000
Factory machinery depreciation 78,000
Lease of equipment for sales staff 18,000
Accounting staff salaries 68,000
Administrative management salaries 148,000
Total fixed costs 339,000
Pretax income 222,200
Income tax (25 %) 55,550
Net income $166,650

Answer 2 :

Contribution margin per unit = Contribution margin / Number of units = $561,200 / 4,600 units = $122.

Contribution margin ratio = Contribution margin per unit / Sales per unit = $122 / $310 = 39.355 %


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