Final answer:
a) The contribution margin for Patel Manufacturing is calculated by subtracting the variable cost per unit from the selling price per unit, resulting in a total contribution margin of $5,040,000.
b) The operating income is then found by subtracting the total fixed costs from the total contribution margin, which amounts to $3,360,000 for 2020.
Step-by-step explanation:
The question you have asked involves calculating the contribution margin and operating income for Patel Manufacturing in 2020, as well as identifying the formula for contribution margin. The steps to calculate this are described here.
a) Calculating Contribution Margin
The contribution margin (CM) is calculated by subtracting the variable cost per unit from the selling price per unit. The formula is:
Contribution Margin per unit = Selling Price per Unit - Variable Cost per Unit
Applying this to Patel Manufacturing:
CM per unit = $69 - $57 = $12 per unit
The total contribution margin is then the CM per unit multiplied by the number of units sold:
Total Contribution Margin = CM per unit * Quantity Sold
For Patel Manufacturing:
Total CM = $12 * 420,000 units = $5,040,000
b) Calculating Operating Income
The operating income is calculated by subtracting the total fixed costs from the total contribution margin:
Operating Income = Total Contribution Margin - Total Fixed Costs
For Patel Manufacturing:
Operating Income = $5,040,000 - $1,680,000 = $3,360,000
Therefore, Patel Manufacturing's contribution margin for 2020 is $5,040,000 and its operating income is $3,360,000.