Question

Variable Costs, Contribution Margin, Contribution Margin Ratio

Super-Tees Company plans to sell 10,000 T-shirts at $24 each in the coming year. Product costs include:

Direct materials per T-shirt $8.40
Direct labor per T-shirt $1.68
Variable overhead per T-shirt $0.72
Total fixed factory overhead $40,000

Variable selling expense is the redemption of a coupon, which averages $1.20 per T-shirt; fixed selling and administrative expenses total $15,000.

Required:

1. Calculate the following values:
Round dollar amounts to the nearest cent and round ratio values to three decimal places (express the ratio as a decimal rather than a percentage).

a. Variable product cost per unit $
b. Total variable cost per unit $
c. Contribution margin per unit $
d. Contribution margin ratio
e. Total fixed expense for the year $

2. Prepare a contribution-margin-based income statement for Super-Tees Company for the coming year. If required, round your per unit answers to the nearest cent.

Super-Tees Company
Contribution-Margin-Based Operating Income Statement
For the Coming Year
Total Per Unit
$ $

$ $

$

3. What if the per unit selling expense increased from $1.20 to $2.55? Calculate new values for the following:
Round dollar amounts to the nearest cent and round ratio values to four decimal places (express the ratio as a decimal rather than a percentage):

a. Variable product cost per unit $
b. Total variable cost per unit $
c. Contribution margin per unit $
d. Contribution margin ratio
e. Total fixed expense for the year $

Answer 1

1.

a. Variable product cost per unit

= (direct material + direct labor + Variable overhead)per unit

=$8.4 + $1.68 + $0.72

=$10.8

b. Total variable cost per unit

= (Variable product cost per unit + variable selling expenses per unit)

= ( $10.8 + $1.2)

= $12

c. Contribution margin per unit

= Sales per unit - variable cost per unit

= $24 - $12

= $12

d. Contribution margin ratio

= (Contribution margin/ sales price)

=($12/$24)

= 0.5

e. Total fixed expenses.

= ( fixed overhead + fixed selling expenses)

= ($40,000+ $15,000)

= $55,000

2. Income statement

Sales ($24*10,000)	$240,000
- variable cost ($12*10,000)	$120,000
Contribution margin	$120,000
- Fixed overhead	$40,000
- Fixed selling and administrative expenses	$15,000
Net income	$65,000

3.

a. Variable product cost per unit

= $10.8

b. Total variable cost per unit

= variable product cost per unit + Variable selling expenses

= $10.8 + $2.55

= $13.35

c.Contribution margin per unit

= $24 - $13.35

= $10.65

d. Contribution margin ratio

= Contribution margin / sales price

= $10.65/$24

= 0.44375

e. Total fixed expenses

= $55,000