Question

Molly Company sells 20,000 units at $12 per unit. Variable costs are $9 per unit, and fixed costs are $25,000. Determine the (a) contribution margin ratio, (b) unit contribution margin, and (c) income from operations.

Answer 1

The following calculations may be used to calculate Molly Company's contribution margin ratio, unit contribution margin, and operating income:

(a) Contribution Margin Ratio = (Selling Price per Unit - Variable Cost per Unit) / Selling Price per Unit

(b) Unit Contribution Margin = Selling Price per Unit - Variable Cost per Unit

(c) Income from Operations = (Selling Price per Unit - Variable Cost per Unit) * Number of Units - Fixed Costs

Given: Number of units sold: 20,000 Selling price per unit: $12 Variable cost per unit: $9 Fixed costs: $25,000

(a) Contribution Margin Ratio: Contribution Margin Ratio = ($12 - $9) / $12 = $3 / $12 = 0.25 or 25%

Therefore, the contribution margin ratio is 25%

(b) Unit Contribution Margin: Unit Contribution Margin = $12 - $9 = $3

Therefore, the unit contribution margin is $3.

(c) Income from Operations: Income from Operations = ($12 - $9) * 20,000 - $25,000 = $3 * 20,000 - $25,000 = $60,000 - $25,000 = $35,000

Therefore, the income from operations is $35,000.

Therefore, the contribution margin ratio is 25%

Therefore, the unit contribution margin is $3.

Therefore, the income from operations is $35,000.