PROBLEM 1–22 Cost Terminology; Contribution Format Income Statement LO1–2, LO1–4, LO1–6 Miller Company’s total sales are $120,000. The company’s direct labor cost is $15,000, which represents 30% of its total conversion cost and 40% of its total prime cost. Its total selling and administrative expense is $18,000 and its only variable selling and administrative expense is a sales commission of 5% of sales. The company maintains no beginning or ending inventories and its manufacturing overhead costs are entirely fixed costs. Required: 1. What is the total manufacturing overhead cost? 2. What is the total direct materials cost? 3. What is the total manufacturing cost? 4. What is the total variable selling and administrative cost? 5. What is the total variable cost? 6. What is the total fixed cost? 7. What is the total contribution margin?

Answer and Explanation:

a. The computation of the total manufacturing overhead cost is

= Conversion cost -  direct labor cost

= ($15,000 ÷ 0.30) - $15,000

= $50,000 - $15,000

= $35,000

b. The compuattion of the direct material cost is

= Conversion cost -  direct labor cost

= ($15,000 ÷ 0.40) - $15,000

= $37,500 - $15,000

= $22,500

c.  The total manufacturing cost is

= direct material cost + direct labor cost + manufacturing overhead cost

= $22,500 + $15,000 + $35,000

= $72,500

d. The total variable selling and administrative cost is

= Sales × commission percentage

= $120,000 × 5%

= $6,000

e.  The total variable cost is

= direct material cost + direct labor cost +  variable selling and administrative cost

= $22,500 + $15,000 + $6,000

= $43,500

f. The fixed cost is

= Manufacturing overhead + fixed selling and admin expenses

= $35,000 + ($18,000 - $6,000)

= $47,000

g. The total contribution margin is

= Sales - variable expenses

= $120,000 - $43,500

= $76,500

We simply applied the above formulas

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