Question

Problem 1:

Dodge Industries incurs the following costs during the 2019:

Depreciation of machinery…………	$15,000
Direct labor………………………	200,000
Direct materials……………………	60,000
Executive salaries…………………	100,000
Insurance…………………………	2,000
Rent on building…………………	50,000
Factory supplies……………………	20,000
Vehicle lease cost…………………	5,000

The company sells one product for $10. During 2019, total sales revenue was $800,000. Dodge determined that only the direct production costs and factory supplies are to be classified as variable costs; all other costs are classified as fixed costs.

Required:  

Using Excel, prepare a spreadsheet that addresses the following:

1. Determine the unit contribution margin.

2. Determine the contribution margin ratio.

3. The company is considering an expansion that will increase sales volume by 20%. The following changes would occur of the plan is implemented:

• An additional machine would add $5,000 of annual depreciation.  

• Rent and insurance would each increase by 25%, as additional factory space would be needed.

• Due to bulk purchasing and economies of scale, the per unit cost of direct materials would decline by 20%.

Nothing else would change.

Prepare a contribution margin income statement, with two columns that compare the current situation without expansion and the situation if the expansion plan is implemented.  

4. The CEO is hoping this plan will increase pretax income by 20% so she can increase her own salary.

Clearly state at the end of it whether the CEO’s expectations will be achieved if the company expands. Will pretax income increase by 20%? Show the calculation.

  

Answer 1

	Unit contribution margin=Sales price per unit-Variable costs per unit
	Number of units sold=Total sales revenue/Sales price per unit=800000/10=80000 units
	Variable costs per unit:
					$
	Direct materials		(60000/80000)		0.75
	Direct labor		(200000/80000)		2.5
	Factory supplies		(20000/80000)		0.25
	Total				3.5
	Unit contribution margin=Sales price per unit-Variable costs per unit=10-3.5=$ 6.5
	Contribution margin ratio=Unit contribution margin/Sales price per unit=6.5/10=0.65=65%
	Contribution margin income statement:
					Without expansion	With expansion
	Sales volume				80000	96000
						(80000*120%)
	Sales revenue			a	800000	960000
						(96000*10)
	Less: Variable costs
	Direct materials				60000	57600
						(96000*0.75*0.80)
	Direct labor				200000	240000
						(96000*2.5)
	Factory supplies				20000	24000
						(96000*0.25)
	Total variable costs			b	280000	321600
	Contribution margin			c=a-b	520000	638400
	Less: Fixed costs
	Depreciation of machinery				15000	20000
						(15000+5000)
	Executive salaries				100000	100000
	Insurance				2000	2500
						(2000*125%)
	Rent on building				50000	62500
						(50000*125%)
	Vehicle lease cost				5000	5000
	Total fixed costs			d	172000	190000
	Pretax income			c-d	348000	448400
	Increase in pretax income=(448400-348000)/348000=0.2885=28.85%
	CEO’s expectations will be achieved if the company expands