Contribution margin, CVP, and Risk Indicators Exercise After taking business classes, Hannah decided to start her own web-based business that would make use of one of her hobbies. She is selling custom-ordered, fabric headbands over the internet for $10 each. Shipping and handling costs are paid by the customer. The fabric and elastic used to make the headbands costs $1 per headband. Hannah's mother, aunt, and sister, who are avid seamstresses, have agreed to sew the headbands for a price of $3 each. (They serve as contract manufacturers.) Hannah has also hired an internet marketing firm to maintain the web site and place banner ads on search engines and other websites. This firm charges Hannah $1,000 per month plus 20% of sales revenue. Hannah also spends $500 per month on other operating expenses such as travel, internet access, textile industry membership fees, lease of her office equipment, etc. Hannah believes she can handle the business unless it grows beyond 4,000 units a month. If volume exceeds 4,000 per month, she'll need to hire additional help in managing the business, as well as non-family members who might charge more to do the work. Determine which costs are variable and which costs are fixed. If it is a variable cost, fine the cost per unit. If it is a fixed cost, find the cost per month. If it is a mixed cost, separate it into a fixed cost and a variable cost. How is the contribution margin per unit defined? Calculate Hannah's contribution margin per headband. What does it tell managers? How is a contribution margin income statement formatted? Create one for Hannah's business, assuming she sells 2,300 headbands in June. Where can contribution margin income statements be used? Why do managers like them? Let's say volume increases 10%....what does this mean when looking at the statement? Use the concept of CM per unit to predict operating income: What would Hannah expect for operating income if she is able to sell 3,800 headbands one month? Could we predict operating income for a month in which 4,500 headbands are sold?