Question

In: Accounting

Contribution margin is useful in determining whether a company’s fixed costs are covered. Test Your Understanding:...

  1. Contribution margin is useful in determining whether a company’s fixed costs are covered.
    • Test Your Understanding: A machine for manufacturing a new lipstick product costs a makeup company $10,000. Manufacturing one tube of lipstick requires
      • $0.50 worth of raw materials like wax, shea butter, dyes, and plastic for the tube;
      • $0.20 of electricity to run the machine to produce one tube; and
      • $0.30 worth of labor to make one tube of lipstick
        1. What represents this company’s fixed costs?
        2. What is the variable cost per unit of lipstick?
      • If a total of 10,000 tubes of lipstick are manufactured using the current variable costs
        1. What are the total fixed costs for manufacturing the 10,000 tubes?
        2. What are the total variable costs for manufacturing the 10,000 tubes?
        3. What are the total manufacturing costs for the 10,000 tubes?
        4. What is the per-unit cost per tube of lipstick?
        5. What is the total profit per unit if one tube of lipstick is sold for $10 per tube?
        6. What is the contribution margin per unit in $?
        7. What is the contribution margin ratio in %?

Solutions

Expert Solution

a. $ 10,000.

The Machine cost of $10,000 is fixed cost to the company.

b. $1 per unit

Explanation:

Particulars Amount
Raw material like wax, shea butter etc., for 1 tube $0.5
Electricity to run the machine $0.2
Labour cost $0.3
variable cost $ 1 per unit

If a total of 10,000 tubes of lipstick is manufactured,

a.Total fixed cost will be $10,000.

Explanation:

Fixed costs remain same irrespective of level of production. Fixed costs are one time costs such as purchase of machine.

b. Total variable cost will be $10,000

Explanation:

Total variable costs = No of units* Variable cost per unit

=10000 units* $1(ref abv table for variable cost)

= $ 10,000.

c. Total manufacturing cost = $ 20,000

Explanation:

Total manufacturing cost = Total variable cost + Total fixed cost

= $10,000 + $10,000

= $20,000

d. per unit cost = $2 per unit

Explanation:

per unit cost of lipstick = Total cost / Total no of units

= $20,000/ 10,000

= $2 per unit

e. profit per unit = $ 8 per unit

Explanation:

Profit per unit = selling price per unit - cost per unit

= $10 - $2

= $8 per unit

f. contribution margin per unit = $9 per unit

Explanation:

Contribution margin per unit = Sales price per unit - variable cost per unit

= $10 - $1

= $9 per unit

g.Contribution margin ratio = 90%

Explanation:

Contribution margin ratio = Contribution per unit / Sales per unit

= $9 / $10

= 0.9 (or) 90%

ekkarill92 answered 2 years ago
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