Question

In: Accounting

Per Unit . % of sales Selling price . $75 . 100% Variable Expenses ....

Per Unit . % of sales

Selling price . $75 . 100%

Variable Expenses . $45 . 60%

Contribution Margin . $30 40%

Fixed expenses are $75,000 per month and the company is selling 3,000 units per month.

2. Refer to the original data . Management is considering using higher quality components that would increase variable cost by $3 per unit. The manager believes that the higher quality product would increase sales by 15% per month. Should the higher - quality components be used. Show all calculations to justify your answers or response.

Question #2 Use contribution Margin Income Statement approach to answer the following questions.

Total Per unit

Sales (8000 units) $208000 $26

Variable Expenses $144000 . $18

Contribution Margin . $64,000 . $8

Fixed Expenses $56,000

Net Operating Income $8000

Prepare contribution format income statement under each of the following conditions (9consider each case independently)

1. The Sales volume increases by 50 units

2. The sales volume decreases by 50 units

3. The sales volume is 7,000 units.

Show all calculations.

Expert Solution

Let us calculate contribution margin and operating profit under Option 1 and Option 2 where

Option 1 = When higher quality components are not used (3,000 units)

Option 2 = When higher quality components are used (3,000 x 115% = 3,450 units)

From the above calculation, we can when the management decides to use higher quality components, then although contribution margin per unit has reduced from 30 to 27 but in total it has increased from $90,000 to $93,150 due to increase in sales. Also since fixed costs remained same in both the options, operating profit has also increased in Option 2 from 15,000 to 18,150,

Therefore, it is advisable to use higher quality components.

Question #2

Contribution format income statement under each of the options given in the question is as under:

ekkarill92 answered 11 months ago

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