Question

Variable Costs, Contribution Margin, Contribution Margin Ratio

Super-Tees Company plans to sell 18,000 T-shirts at $21 each in the coming year. Product costs include:

Direct materials per T-shirt   $7.35
Direct labor per T-shirt   $1.47
Variable overhead per T-shirt   $0.63
Total fixed factory overhead   $40,000
Variable selling expense is the redemption of a coupon, which averages $1.05 per T-shirt; fixed selling and administrative expenses total $19,000.

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. What if the per unit selling expense increased from $1.05 to $2.25? 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
d. Contribution margin ratio   
e. Total fixed expense for the year   

Answer 1

1. The computation is shown below:-

a. Variable product cost per unit

Direct materials per T-shirt + Direct labor per T-shirt + Variable overhead per T-shirt
= $7.35 + $1.47 + $0.63
= $9.45

b. Total variable cost per unit
= Variable product cost per unit + Average per T-shirt
= $9.45 + $1.15
= $10.60

c. Contribution margin per unit
= Each T-Shirt cost - Total variable cost
= $21 - $10.60
= $10.40

d. Contribution margin ratio
= Contribution margin per unit / Each T-Shirt cost
= $10.40 / $21
= 0.4952 or 49.52%

e.Total fixed expense for the year
= Total fixed factory overhead + Fixed selling and administrative expenses
= $40,000 + $19,000
= $59,000

2. The computation is shown below:-

a. Variable product cost per unit
Direct materials per T-shirt + Direct labor per T-shirt + Variable overhead per T-shirt
= $7.35 + $1.47 + $0.63
= $9.45

b. Total variable cost per unit
= Variable product cost per unit + Per unit selling expense
= $9.45 + $2.25
= $11.70

c. Contribution margin per unit
= Each T-Shirt cost - Total variable cost
= $21 - $11.70
= $9.30

d. Contribution margin ratio
= Contribution margin per unit / Each T-Shirt cost
= $9.30 / $21
= 0.4429 or 44.29%

e.Total fixed expense for the year
= Total fixed factory overhead + Fixed selling and administrative expenses
= $40,000 + $19,000
= $59,000