Question

Francois French manufactures cheese, which he normally sells at €20/kg, on which sales commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%.

Fixed costs		Costs per kg.
Plant depreciation	€8,000	Direct materials	€4
Other plant costs	15,000	Direct labor	2
Corporate salaries	10,000	Var. factory O/H	3
Advertising	3,000

If sales are 5,000 kgs, which of the following is true?

		Total contribution margin is €50,000
		Ratio of total contribution margin to net income before taxes is 3.57
		Taxes payable are €4,200
		Operating leverage is 42%
		All of the above

Answer 1

1)	Contribution margin per unit
	Sells				20
	less:Variable expense
	Direct materials			4
	Direct labor			2
	Variable factory overhead			3
	sales commission 20*5%			1
	total variable expense				10
	Contribution margin				10
2)	total contribution (5,000*10)=				50,000
	less:fixed cost
	Plant depreciation			8,000
	other plant costs			15,000
	corporate salaries			10,000
	Advertising			3,000
	total fixed cost				36,000
	income before tax				14,000
	less:income tax 14000*30%=				4200
	net income				9,800
3)	Ratio of total contribution margin to net income before
	taxes is
	50,000/14,000
	3.57
4)	operating leverage = fixed cost/total cost
			36,000/80,000
			42%
	(total cost = fixed cost +variable cost)
	Answer - all of the above