Question

Classic Cabinets has a factory that produces custom kitchen cabinets. It has multiple product lines.

Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs.

The materials include $1,500 for the wood and other materials on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $12.    The sales price will be set at a markup of 85%.

   The company estimates that it will have 16,000 direct labor hours in total for the kitchen cabinets.

It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows:

	Salaries- office & administrative					$ 520,000
	Salaries for factory personal					$ 220,000
	Office Rent					$ 125,000
	Factory Rent					$   20,000
	Utilities and Misc office expenses(based on units sold)					$   20,000
	Travel(based on units sold)					$   24,000
	Insurance - office					$   14,000
	Depreciation - office equipment					$   45,000
	Depreciation for factory equipment					$   70,000
	Advertising					$   20,000
	Sales commissions(based on units sold)					$   45,000
	Factory Property taxes					$   10,000
	Maintenance for factory equipment					$   80,000

1) What is the Contribution Margin (CM) in total and per unit dollars, and CM% for the sale of 800 kitchen cabinets?

2) Explain the importance of contribution margin (CM) and how it can be used by companies to predict future income. Create some examples with numbers to show how it can be used.

Note: An excel spreadsheet is preferred to show the importance of CM.

Please show calculation. Thank you!  

Answer 1

1.

Manufacturing Overhead = (Salaries for factory personal+Factory Rent+Depreciation for factory equipment+Factory Property taxes+Maintenance for factory equipment)

=$ 220,000+$   20,000+$   70,000+$   10,000+$   80,000) = $400000

Selling & Admin Overhead = (Salaries- office & administrative+Office Rent+Utilities and Misc office expenses+Travel+Insurance - office+Depreciation - office equipment+Advertising+Sales commissions)
=$ 520,000+$ 125,000+$   20,000+$   24,000+$   14,000+$   45,000+$   20,000+$   45,000) =$813000

Total Labour = 20x12x800 = $192000

Total Material = 1500 x 800 =$1200000

Total Cost = Material + Labour + Manufacturing o/d + Seiilning & Admin o/d = $2605000

Selling Price at 185% of Total Cost = $4819250
Selling price per unit = Totals sales / no of unit sold = $4819250 / 800 = $6024.0625

2.

Contribution margin is an important cost accounting concept.
It reflects the profitability of concern.

Companies calculate contribution margins for a single product, multiple groups of products or for their entire sales volume.
And by doing so, management can take different decisions related to production.

Suppose, The future sale of company is 1000 units.
Using contribution margin, we can calculate future income as follows-