Question

Suppose that Larimer Company sells a product for $20. Unit costs are as follows: Direct materials $2.10 Direct labor 1.25 Variable factory overhead 2.00 Variable selling and administrative expense 1.05 Total fixed factory overhead is $56,590 per year, and total fixed selling and administrative expense is $38,610.

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

SOLUTION

1. Variable cost per unit

Direct materials	2.10
Direct labor	1.25
Variable factory overhead	2.00
Variable selling and administrative expense	1.05
Variable cost per unit	6.40

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

= $20 - $6.40 = $13.60

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

= 13.60 / 20 = 68%

Variable cost ratio = Variable cost per unit / Selling price per unit

= 6.40 / 20 = 32%

3. Fixed expenses = Total fixed factory overhead + Total fixed selling and administrative expense

= $56,590 + $38,610 = 95,200

Break-even units = Fixed expenses/Unit contribution margin

= 95,200 / 13.60 = 7,000 units

4. Contribution margin income statement-

Sales revenue (7,000*$20)	140,000
Variable expenses (7,000*$6.40)	(44,800)
Contribution margin	95,200
Fixed expenses	(95,200)
Net operating income	0