Question

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.

Answer 1

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 %