Question

Great-Garments Company plans to sell 9,000 T-shirts at $15 each in the coming year. Product costs include:

Direct materials per T-shirt	$5.00
Direct labour per T—shirt	$1.00
Variable overhead per T-shirt	$0.65
Total fixed factory overhead	$44,000

Variable selling expense is the redemption of a coupon, which averages $0.85 per T-shirt; fixed selling and administrative expenses total $19,000.

Required:

( for the following questions, please write the formula as well)

a. Total variable cost per unit

b. Contribution margin per unit   

c. Contribution margin ratio

d. Break-even point in units (Q)      

e. Break- Even point in sales ($ amount)

f. Required sales in units (Q) to make a profit of $12,000

g. Required sales value ($) to make a profit of $12,000

h. Prepare a contribution—margin-based income: statement for Great Garment Company for the coming year.

Answer 1

Solution to required (a):-

Total Variable Cost Per Unit

= (Direct Material + Direct Labor + Variable Overhead + Variable Selling Expense)

= $(5 + 1 + 0.65 + 0.85)

= $ 7.5 Per T- Shirt

Solution to required (b):-

Contribution Margin Per Unit

= (Selling Price Unit - Total Variable Cost Per Unit)

=$(15 - 7.5)

= $7.5 Per T- Shirt

Solution to required (c):-

Contribution Margin Ratio

= (Contribution Per Unit / Selling Price Per Unit) * 100

= ($7.5 /$ 15) * 100

= 50%

Solution to required (d):-

Break - Even Point (Units)

= ( Total Fixed Cost / Contribution Per Unit)

Here,

Total Fixed Cost

= (Total Fixed Factory Overhead + Total Fixed Administration and Selling Expense)

=$(44,000 + 19,000)

= $ 63,000

Contribution Per Unit = $7.5 Per T-shirt

So Break Even Point (Units) = ($63,000 / $7.5) = 8,400 Units

Solution to required (e):-

Break - Even Point ($)

= (Total Fixed Cost / Contribution Margin Ratio)

= ($63,000 / 50%)

= $126,000

Note:- Total Fixed Cost Is Caliculated in Required d and Contribution Margin Ration Is Calculated in Required c

Solution to required (f):-

Sales in units (Q) to make a profit of $12,000

= (Total Fixed Cost + Profit ) / Contribution Per Unit

= ($63,000 + $12,000) / $7.5

= 10,000 Units

Solution to required (g):-

Sales value ($) to make a profit of $12,000

= (Total Fixed Cost + Profit ) / Contribution Margin Ratio

= ($63,000 + $12,000) / 50%

= $150,000

Solution to required (h):-

Particulars	Amount($)	Amount($)
Sales Revenue ($15 * 9,000 T-Shirts)		135,000
Less:- Variable Cost
Direct Material ($5 * 9,000 T-Shirts)	45,000
Direct Labor ($1 * 9,000 T-Shirts)	9,000
Variable overhead ($0.65 * 9,000 T-Shirts)	5,850
Variable selling expense ($0.85 * 9,000 T-Shirts)	7,650	(67,500)
Contribution margin ( Sales - variable Cost)		67,500
Less:- Fixed Cost
(Total fixed factory overhead + fixed selling and administrative expenses)	(44,000+19,000)	(63,000)
Net Operating Income ( Contribution Margin - Fixed Cost)		4,500

Note :- Total Fixed Cost Is Calculated in required (d)