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 $1,000for the wood and other materials of $200. Both items listed are on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 65%.

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

It assumes 800units 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$ 12,000

Depreciation -office equipment$ 40,000

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

QUESTION:

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

Answer 1

Contribution Margin in Total = Total Sale- Varibale Cost

38,37,900-11,20,000

= 27,17,9000

Contribution Margin Per Unit = 4797.38- 1400

= 3397.38

CM in % = Contribution/ Sale Price

3397.38/4,797

= 30%

Contribition Margin is the Amount that is available for Fixed Cost and Profits, if particular product has contribution it means product is showing profit after recovering it varible cost, so it is advised to deal with such prodcut