Question

) 123 Corporation sells two products Product A and product B which sell in a 3:2 ratio. Product A has a variable cost of $65 per unit and sells for $70. 123 Corporation has fixed expenses of $140,000. When 123 corporations sells 25,000 units they have an operating income of $20,000.

a) What is the contribution margin on Product B?

ANS:

b) Assuming variables costs of $80, what is the sales price of product B?

Ans:

c) Prepare a contribution margin income statement for 123 corporation.

Answer 1

a) The contribution margin on Product B is calculated as follows:

Contribution Margin for 123 corporation = Fixed Cost + Operating income

                          = $140,000 + $20,000

                            = $160,000

The contribution margin on Product B = $160,000 * 2/5

                                                      = $64,000

b) The sales price of product B is calculated as follows:

Contribution Margin Per Unit for 123 corporation = $160,000 / 25,000 units

                                                                        = $6.40 Per Unit

So Sales Price Per Unit for 123 corporation = Contribution Margin Per Unit + Variables Costs Per Unit

                                                                  = $6.40 + $80

                                                              = $86.40

The sales price of product B = $86.40 * 3/5

                                          = $51.84

c) A contribution margin income statement for 123 corporation is as follows:

	$
Sales (25,000 units * $86.40)	2,160,000
Less: Variable Cost (25,000 units * $80)	2000,000
Contribution Margin	160,000
Less: Fixed Cost	140,000
Operating Income	$20,000