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.
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
Direct labor hours	16,000
Material cost (wood and other)	$1,200
Custom kitchen average labor hours	20	hours
Labor cost per hour	$10
Markup	65%
Sold unit per year	800	units
Total cost /unit	$1,400
Selling price /unit	$2,310
Income Statement
Sales	$1,848,000
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

The CM means the Contribution Margin that a company is earning over and above the Variable costs employed to do production. The profit figure is achieved by deducting the Fixed Costs of the Contribution Margin. Suppose the Sales is 100, Variable cost employed is 60, thus, the CM came out is 100-60=40 or in percentage terms 40/100 or 40%. If Fixed cost is 20, then profit is 40-20 = 20.

In future if our sales being 150, then CM would be 150*40% = 60 and Profit will be 60-20 = 40. Also, if our sales being 200, then CM would be 200*40% = 80 and Profit will be 80-20 = 60.

In the problem, The CM is = Sale Price – Variable costs = 2310 – [1200 + (20*10) ] = 2310 – 1400 = 910, in percentage terms CM = 910/2310 = 39.39%

Total CM is (2310 * 39.39%) * 800 = $728000 & Fixed Cost = $897000, the profit = 728000 – 897000 =( -169000).

If in future, the units sold is 1600, the profit would be derived as: Total CM would be (2310 * 39.39%) * 1600 = $1456000 & Fixed Cost = $897000, the profit = 1456000 – 897000 = 559000.