Question

Suppose that Larimer Company sells a product for $19. Unit costs are as follows: Direct materials $2.05 Direct labor 1.45 Variable factory overhead 2.20 Variable selling and administrative expense 1.14 Total fixed factory overhead is $47,816 per year, and total fixed selling and administrative expense is $38,520.

Required: 1. Calculate the variable cost per unit and the contribution margin per unit.

2. Calculate the contribution margin ratio and the variable cost ratio.

3. Calculate the break-even units.

4. Prepare a contribution margin income statement at the break-even number of units. Enter all amounts as positive numbers.

Answer 1

ANSWER:

1. Variable cost per unit = Direct materails + Direct Labor + Variable factory overhead + Variable selling and administrative expense

= $2.05 + $1.45 + $2.20 + $1.14 = $6.84

Contribution margin per unit = Sales price - Variable cost per unit

= $19 - $6.84 = $12.16

2. Contribution margin ratio = Contribution margin per unit / Sales price

= $12.16 / $19 = 64%

Variable cost ratio = Variable cost per unit / Sales price

= $6.84 / $19 = 36%

3. Break even units = Fixed costs / Contribution margin per unit

= (47,816+38520) / $12.16

= 86,336 / $12.16= 7,100 units

4. Contribution margin income statement-

Particulars   Amount ($)
Sales (7,100*$19) 134,900
Variable cost (7,100*$6.84) 48,564
Total contribution margin 86,336
Fixed costs (86,336)
Operating income  0

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