Question

Stuckies produces white school glue. Their glue bottles are primarily sold at department stores across the country. The cost of manufacturing and marketing their glue, at their normal factory volume of 20,000,000 bottles of glue per month, is shown in the table below. Stuckie sells their glue bottles for $1.50 each. Stuckie is making a small profit, but they would prefer to increase their Operating Income. Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.

1.What is their monthly fixed cost, variable cost per bottle of glue, and contribution margin per bottle of glue? Show your calculations for each.

2. Prepare a one-month Contribution Margin Income Statement for the company using the given financial data at their normal factory volume. Include line items for each type of cost as well as subtotals for the variable and fixed costs.

3.Using a one-month Contribution Margin Income Statement, verify that your calculated break-even volume results in Operating Income of Zero. (Prepare the entire Contribution Margin statement at the break-even level.)

Answer 1

1. 

Contribution margin income statementat normal factory volume

particulars	amount(per unit)	total(per month/20,000,000 units)
sales	1.50	3,00,00,000
less variable cost(0.30+0.35+.0.10)	0.75	1,50,00,000
gross contribution margin	0.75	1,50,00,000
less variable marketing costs	0.05	1,000,000
contribution margin	0.70	1,40,00,000
less fixed manufacturing expenses	0.25	50,00,000
less fixed marketing expenses	0.20	40,00,000
net operating income	0.25	50,00,000

 

Total monthly fixed cost = 50,00,000+40,00,000 = 90,00,000 

total variable cost per unit = 0.75+.0.05 = 0.80 

contribution margin per unit = 0.70 = 46.66%(0.70/1.50 * 100)

 

2.

break even volume = total fixed costs / (selling price per unit - total variable cost per unit)

total fixed costs = 90,00,000/ (1.5-0.80) = 12857142.9 or 12857143 UNITS

 

3.

Contribution margin statement at break-even level

particulars	amount
sales at BREAK EVEN (1,28,57,143 *1.5)	1,92,85,714
LESS total variable cost (0.80*1,28,57,143)	1,02,85,714
contribution margin	90,00,000
less total fixed costs	90,00,000
net operating income	0

 

At 20,000,000 units production the net operating income is 50,00,000 whereas at Break even the net operating income is zero.

1. Total monthly fixed cost = 50,00,000+40,00,000 = 90,00,000 

total variable cost per unit = 0.75+.0.05 = 0.80 

contribution margin per unit = 0.70 = 46.66%(0.70/1.50 * 100)

2. 12857143 UNITS