Question

The following costs result from the production and sale of 4,550 drum sets manufactured by Tight Drums Company for the year ended December 31, 2019. The drum sets sell for $305 each. The company has a 40% income tax rate.

Variable production costs
Plastic for casing	$	127,400
Wages of assembly workers		423,150
Drum stands		168,350
Variable selling costs
Sales commissions		118,300
Fixed manufacturing costs
Taxes on factory		9,500
Factory maintenance		19,000
Factory machinery depreciation		79,000
Fixed selling and administrative costs
Lease of equipment for sales staff		19,000
Accounting staff salaries		69,000
Administrative management salaries		149,000

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

Contribution Margin Income Statement
Sales:		1,387,750
Variable costs:
Plastic for cashing	127,400
Wages of assembly workers	423,150
Drum stands	168,350
Sales commissions	118,300
Total variable costs		837,200
Contribution margin		550,550
Fixed costs:
Taxes on factory	9,500
Factory maintenance	19,000
Factory machinery depreciation	79,000
Lease of equipment for sales staff	19,000
Accounting staff salaries	69,000
Administrative management salaries	149,000
Total fixed costs		344,500
Pre tax income		206,050
Income tax		82,420
Net income		123,630

Contribution Margin Income Statement(Partial)
Sales:		305
Variable costs:
Plastic for cashing	28
Wages of assembly workers	93
Drum stands	37
Sales commissions	26
Total variable costs		184
Contribution Margin		121
Contribution Margin Ratio
Sales	305	100%
Variable costs	184	60%
Contribution Margin	121	40%