Question

The following costs result from the production and sale of 4,050 drum sets manufactured by Tight Drums Company for the year ended December 31, 2019. The drum sets sell for $255 each. The company has a 30% income tax rate.

Variable production costs
Plastic for casing	$	72,900
Wages of assembly workers		336,150
Drum stands		109,350
Variable selling costs
Sales commissions		64,800
Fixed manufacturing costs
Taxes on factory		10,500
Factory maintenance		21,000
Factory machinery depreciation		81,000
Fixed selling and administrative costs
Lease of equipment for sales staff		21,000
Accounting staff salaries		71,000
Administrative management salaries		151,000

Required:
1. Prepare a contribution margin income statement for the year.
2. Compute its contribution margin per unit and its contribution margin ratio.
3. For each dollar of sales, how much is left to cover fixed costs and contribute to operating income?

Answer 1

1.Prepare a contribution margin income statement for the year.

Contribution Margin Income Statement - Tight Drums Company
Particulars		Amount
Sales ( 4050 drum sets x $ 255)		$ 1032750
Less: Variable cost
Variable production Cost
Plastic for casting	$ 72900
Wages of Assembly Worker's	$ 336150
Drum Stand	$ 109350
Variable Selling Cost
Sales Comission	$ 64800
Total Variable cost		$ 583200
Contribution		$ 449550
Less: Fixed Cost
Fixed Manufacturing Cost
Tax on Factory	$ 10500
Factory Maintainance	$ 21000
Factory Machinery Depreciation	$ 81000
Fixed Selling & Administrative Expense
Lease of Equipment	$ 21000
Accounting Staff Slaries	$ 71000
Administrative Management Salaries	$ 151000
Total Fixed Cost		$ 355500
Net Income before Tax		$ 94050
Less: Tax @ 25%		$ 23512.50
Net Income		$ 70537.50

Contribution = Sales - Total Variable cost

Net Income before Tax = Contribution - Total Fixed Cost

Net Income = Net Income before Tax - Tax @ 25%

2.Compute its contribution margin per unit and its contribution margin ratio

Total Contribution	$ 449550
No. of Unit sold	4050
Contribution Margin per Unit ( Total Contribution/ No. of Unit Sold)	$ 111

Contribution Margin Ratio= Contribution Margin per Unit/ Selling Price per Unit

= $ 111 / $ 255 = 43.5%

3.For each dollar of sales , amount left to cover fixed costs and contribute to operating income is $ 0.435.( Contribution margin ratio of 43.5% implies that $ 0.435 of each dollar of sales is left to cover fixed costs and contribute to operating income )

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