Question

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Fixed factory overhead is $20,000 and fixed selling and administrative expense is $29,500.

	Required:
1.	Calculate the variable cost ratio.
2.	Calculate the contribution margin ratio.
3.	Prepare a contribution margin income statement based on the budgeted figures for next year. In a column next to the income statement, show the percentages based on sales for sales, total variable cost, and total contribution margin.

Answer 1

Answer:
1)
Variable cost ratio          = Variable Cost (or) Expenses / Sales          =   ( 5,000 Units x $ 45 ) / ( 5,000 Units x $ 75)          =      $ 225,000 / $ 375,000          =      60%
Variable cost ratio =      60%
2)
Contribution margin ratio           = (Sales (-) Variable Cost) / Sales            = ( $ 375,000 (-) $ 225,000 ) / $ 375,000            =    $ 150,000 / $ 375,000            =      40%
Contribution margin ratio =      40%
3)
Contribution margin income statement
Particulars	Amount (in $ )	Percent of Sales
Sales     ( 5,000 x $ 75)	$ 375,000	100%
Less: Variable costs (or) Expenses                ( 5,000 x $ 45)	($ 225,000)	60% ($ 225,000 / $ 375,000)
Contribution margin	$ 150,000	40% ($ 150,000 / $ 375,000 )
Less: Fixed costs (or) Expenses              ( $ 20,000 + $ 29,500)	($ 49,500)
Net income (or) Net Operating Income	$ 100,500