Chapter 21, Problem 1APSA

Requirement 1

To determine

To prepare:

Contribution Income Statement for Tight Drums Company

Answer to Problem 1APSA

Solution:

Tight Drums Company
Contribution Margin Income statement
Sales		500,000
Less: Variable costs
Variable production costs
Plastic for casting	17,000
Wages for assembly workers	82,000
Drum stands	26,000
Variable selling costs
Sales commissions	15,000
Total variable costs		140,000
Contribution margin		360,000
Less: Fixed costs
Fixed manufacturing costs
Taxes on factory	5,000
Factory maintenance	10,000
Factory machinery depreciation	40,000
Fixed selling and administration costs
Lease of equipment for sales staff	10,000
Accounting staff salaries	35,000
Administrative management salaries	125,000
Total fixed expenses		225,000
Net Operating Income		135,000

Explanation of Solution

The contribution income statement is prepared as under −
Given,

• Sales per price unit = $ 500
• Number of units sold = 1,000 drums
Variable production costs −

• Plastic for casting = $ 17,000
• Wages for 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 administration costs
• Lease of equipment for sales staff = $ 10,000
• Accounting staff salaries = $ 35,000
• Administrative management salaries = $ 125,000

The calculations are made as under −

1. Sales revenue −

  $\begin{array}{l}Salesrevenue=SalesperpriceunitXNumberofunitssold\hfill \\ Salesrevenue=\$500X1,000drums\hfill \\ Salesrevenue=\$500,000\hfill \end{array}$
2. Total variable costs −

  $\begin{array}{l}TotalVariablecosts=Variableproductioncosts+Variablesellingcosts\hfill \\ TotalVariablecosts=Plasticforcasting+Wagesforassemblyworkers+Drumstands+Salescommissions\hfill \end{array}$


  $\begin{array}{l}TotalVariablecosts=\$17,000+\$82,000+\$26,000+\$15,000\hfill \\ TotalVariablecosts=\$140,000\hfill \end{array}$

3. Contribution Margin −

  $\begin{array}{l}ContributionMargin=Sales–Totalvariablecosts\hfill \\ ContributionMargin=\$500,000-\$140,000\hfill \\ ContributionMargin=\$360,000\hfill \end{array}$
4. Total fixed costs −

  $\begin{array}{l}Totalfixedcosts=Fixedmanufacturingcosts+Fixedsellingandadministrationcosts\hfill \\ \begin{array}{l}Totalfixedcosts=Taxesonfactory+Factorymaintenance+Factorymachinerydepreciation\\ +Leaseofequipmentforsalesstaff+Accountingstaffsalaries\\ +Administrativemanagementsalaries\end{array}\hfill \end{array}$


  $\begin{array}{l}Totalfixedcosts=\$5,000+\$10,000+\$40,000+\$10,000+\$35,000+125,000\hfill \\ Totalfixedcosts=\$225,000\hfill \end{array}$

5. Net operating income −

  $\begin{array}{l}Netoperatingincome=ContributionMargin-Totalfixedcosts\hfill \\ Netoperatingincome=\$360,000-\$225,000\hfill \\ Netoperatingincome=\$135,000\hfill \end{array}$

The net operating income of Tight Drums company is = $ 135,000.

Conclusion

Thus, the contribution Income Statement for Tight Drums Company has been prepared.

Requirement 2

To determine

To compute:

1. Contribution Margin per unit
2. Contribution Margin Ratio

Answer to Problem 1APSA

Solution:

1. Contribution Margin per unit = $ 360
2. Contribution Margin Ratio = 72 %

Explanation of Solution

The contribution margin per unit and contribution margin ratio are calculated as under −
Given,

• Sales revenue = $ 500,000
• Number of units sold = 1,000 drums
• Total Contribution Margin = $ 360,000

The contribution margin per unit −

1. Contribution Margin per unit −


  $\begin{array}{l}ContributionMarginperunit=\frac{TotalContributionMargin}{Numberofunitssold}\\ ContributionMarginperunit=\frac{\$360,000}{\text{1,000 drum}s}\\ ContributionMarginperunit=\$360\end{array}$

2. Contribution Margin Ratio −

  $\begin{array}{l}ContributionMargin\text{ Ratio }=\frac{TotalContributionMargin}{Sales\mathrm{Re}venue}\\ ContributionMargin\text{ Ratio }=\frac{\$360,000}{\text{\$ 500,000 }}\\ ContributionMargin\text{ Ratio }=72\%\end{array}$

Conclusion

Thus, the contribution margin per unit and contribution margin ratio has been calculated.

Requirement 3

To determine

To Interpret:

The contribution margin and contribution margin ratio.

Answer to Problem 1APSA

Solution:

The contribution margin explains how much the portion of sales is left after deducting the variable costs of the product. While the contribution margin ratio the percent of each sales dollar is available for fixed costs and for net operating income.

Explanation of Solution

The above answer can be explained as under as the contribution margin is calculated as −

  $ContributionMargin=Sales–Variablecosts$

While the contribution margin ratio is calculated as −

  $ContributionMargin\text{ Ratio }=\frac{TotalContributionMargin}{Sales\mathrm{Re}venue}$

Thus, it can be seen that, contribution margin is the portion of the sales left after deducting variable costs for fixed costs and net operating income while, the contribution margin ratio the percent of each sales dollar is available for fixed costs and for net operating income.

Conclusion

Thus, the contribution margin and contribution margin ratio has been explained.