The following costs result from the production and sale of 2,000 drum sets manufactured by Harris Drum

Question:

The following costs result from the production and sale of 2,000 drum sets manufactured by Harris Drum Company for the year ended December 31, 2009. The drum sets sell for $500 each. The company has a 25% income tax rate.

Variable production costs

Plastic for casing . . . . . . . . . . . . . . . . . . . . $ 34,000

Wages of assembly workers . . . . . . . . . . . . 164,000

Drum stands . . . . . . . . . . . . . . . . . . . . . . . 52,000

Variable selling costs

Sales commissions . . . . . . . . . . . . . . . . . . . 30,000

Fixed manufacturing costs

Taxes on factory . . . . . . . . . . . . . . . . . . . . 10,000

Factory maintenance . . . . . . . . . . . . . . . . . 20,000

Factory machinery depreciation . . . . . . . . . 80,000

Fixed selling and administrative costs

Lease of equipment for sales staff . . . . . . . . 20,000

Accounting staff salaries . . . . . . . . . . . . . . . 70,000

Administrative management salaries . . . . . . . 250,000


Required

1. Prepare a contribution margin income statement for the company.

2. Compute its contribution margin per unit and its contribution margin ratio.

Analysis Component

3. Interpret the contribution margin and contribution margin ratio from part 2.


Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Managerial Accounting

ISBN: 978-0073379586

2010 Edition

Authors: John J. Wild, Ken W. Shaw

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