The following costs result from the production and sale of 1,000 drum sets manufactured by Tight Drums Company for the year ended December 31, 2015. The drum sets sell for $500 each. The company has a 25% income tax rate. Variable production costs
Plastic for casing $17,000
Wages of assembly workers 82,000
Drum stands 26,000
Variable selling costs
Sales commissions 15,000
Fixed manufacturing costs
Taxes on factory 5,000
Factory maintenance 10,000
Factory machinery depreciation 40,000
Fixed selling and administrative costs
Lease of equipment for sales staff 10,000
Accounting staff salaries 35,000
Administrative management salaries125,000
Compute its contribution margin per unit and its contribution margin ratio. Prepare a contribution margin income statement. Interpret the contribution margin and contrubition margin ratio.

Answer and Explanation:

The computation of contribution margin per unit and its contribution margin ratio and the Preparation of contribution margin income statement is shown below:-

Particulars                                     Amount

Sales Revenue                             $500,000

(1,000 × 500)

Variable Costs

Plastic for casing                      $17,000

Wages of assembly workers       $82,000

Drum stands                                 $26,000

Sales commission                        $15,000

Total Variable costs                     $140,000

Contribution                                  $360,000

($500,000 - $140,000)

Fixed Costs

Taxes on factory                           $5,000

Factory maintenance                    $10,000

Factory machinery depreciation  $40,000

Lease of equipment for

sales staff                                        $10,000

Accounting staff salaries               $35,000

Administrative management

salaries                                          $125,000

Total fixed Cost                            $225,000

Income                                           $135,000

($360,000  - $225,000)

Taxes at 25%                                 $33,750

Net Income                                    $101,250

Contribution Margin per unit         $360

($360,000 ÷ 1,000)

CM Ratio                                         0.72

(360,000 ÷ 500,00)

Answer and Explanation:

The computation of contribution margin per unit and its contribution margin ratio and the Preparation of contribution margin income statement is shown below:-

Particulars                                     Amount

Sales Revenue                             $500,000

(1,000 × 500)

Variable Costs

Plastic for casing                      $17,000

Wages of assembly workers       $82,000

Drum stands                                 $26,000

Sales commission                        $15,000

Total Variable costs                     $140,000

Contribution                                  $360,000

($500,000 - $140,000)

Fixed Costs

Taxes on factory                           $5,000

Factory maintenance                    $10,000

Factory machinery depreciation  $40,000

Lease of equipment for

sales staff                                        $10,000

Accounting staff salaries               $35,000

Administrative management

salaries                                          $125,000

Total fixed Cost                            $225,000

Income                                           $135,000

($360,000  - $225,000)

Taxes at 25%                                 $33,750

Net Income                                    $101,250

Contribution Margin per unit         $360

($360,000 ÷ 1,000)

CM Ratio                                         0.72

(360,000 ÷ 500,00)

We simply applied the above format

answer; rapid growth in buyer demand and high buyer switching cost;