Question

Lanning Company sells 160,000 units at $45 per unit. Variable costs are $27 per unit, and fixed costs are $975,000. Determine 

a) the contribution margin ratio,

(b) the unit contribution margin, and 

c) income from operations. 

Answer 1

Contribution margin ratio : It is a ratio that calculates the contribution margin earned by the firm from sales in order to cover the fixed costs and generate a profit. It is represented as a percentage of the available margin from each dollar of sales to cover fixed expenditures and produce profit. It is also known as the profit volume ratio.

(a) Calculation of Contribution margin ratio

Contribution margin ratio = Contribution Margin  / Sales x100

Selling price per unit = $45 per unit

Variable price per unit = $27 per unit

Contribution margin ratio = Contribution margin / Sales x 100

= Selling price per unit - Variable cost per unit / Selling price per unit  x 100

= $45 - $27 / $45 x 100

= 40%

(b) Calculation of unit contribution margin

Selling price per unit = $45 per unit

Variable Cost per unit = $27 per unit

Contribution margin per unit = ( Selling price per unit ) - (Variable cost per unit)

=$45 per unit - $27 per unit

=$18 per unit

(c) Calculation of income from operations

Particulars	Amount$
Sales	7,200,000
Less : Variable costs	4,320,000
Contribution margin	2,880,000
Less : Fixed costs	9,75,000
Income from operations	1,905,000

Calculation of amount of sales

No.of units sold = 160,000 units

Selling price per unit = $45 per unit

Sales = No.of units sold  x Selling price per unit

=160,000 x $45 per unit

=$7,200,000

Calculation of amount of variable cost

No.of units sold = 160,000 units

Variable cost per unit = $27 per unit

Variable cost per unit   = No.of units sold x Variable cost per unit

=160,000 x $27 per unit

=$43,20,000

 

(a)Therefore , the contribution ratio is 40%

(b)Therefore, the unit contribution margin is $18 per unit

(c)Therefore, the income from operations is $19,05,000