Question

Freshmart, Inc., began operations this year. The company produced 1,000 units and sold 1,000 units at a selling price of $100 per unit. Fixed overhead costs totaled $30,000 and fixed selling and administrative expenses were $15,000. Variable production costs were $25.00 per unit while variable selling and administrative expenses were $10.00 per unit. Contribution margin was:

A. $20,000.
B. $45,000.
C. $65,000.
D. $55,000.

Answer 1

C. $65,000

Step-by-step explanation:

Units produced (U) = 1,000

Selling price (P) = $100 per unit

Fixed overhead costs = $30,000

Fixed selling and administrative expenses = $15,000

Variable production costs (Vp) = $25.00 per unit

Variable selling and administrative expenses (Vs) = $10.00 per unit

Contribution margin (CM) is defined as Sales revenue (R) minus variable costs (V). Thus, fixed costs should not be considered. Sales revenue is given by:

`R= U*P = 1,000*\$100\\R = \$100,000`

Variable costs are given by:

`V= U*(V_(p)+V_(s)) = 1,000*(\$25.00 +\$10.00)\\V = \$35,000`

Therefore, the contribution margin is:

`CM = R- V = \$100,000-\$35,000\\CM = \$65,000`