Question

The following costs result from the production and sale of 4,850 drum sets manufactured by Tight Drums Company for the year ended December 31, 2019. The drum sets sell for $335 each. The company has a 30% income tax rate. Variable production costs Plastic for casing $ 164,900 Wages of assembly workers 480,150 Drum stands 208,550 Variable selling costs Sales commissions 155,200 Fixed manufacturing costs Taxes on factory 6,500 Factory maintenance 13,000 Factory machinery depreciation 73,000 Fixed selling and administrative costs Lease of equipment for sales staff 13,000 Accounting staff salaries 63,000 Administrative management salaries 143,000 Required: 1. Prepare a contribution margin income statement for the year. 2. Compute its contribution margin per unit and its contribution margin ratio. 3. For each dollar of sales, how much is left to cover fixed costs and contribute to operating income

Answer 1

Tight Drums Company

1. Contribution Margin Income Statement for the year ended December 31:

Sales Revenue $1,624,750

Variable costs 1,008,800

Contribution margin $615,950

Fixed costs 311,500

Net operating income $304,450

2a, Contribution margin per unit = $127

2b. Contribution margin ratio = 0.379

3. For each dollar, $0.38 is left to cover fixed costs and contribute to operating income.

Step-by-step explanation:

a) Data and Calculations:

Production and sales units for the year ended December 31, 2019 = 4,850

Selling price per drum set = $335

Income tax rate = 30%

Variable production costs:

Plastic for casing $ 164,900

Wages of assembly workers 480,150

Drum stands 208,550

Variable selling costs

Sales commissions 155,200

Total variable costs $1,008,800

Variable cost per unit = $208 ($1,008,800/4,850)

Contribution Margin Income Statement for the year ended December 31:

Sales Revenue $1,624,750 ($335 * 4,850)

Variable costs 1,008,800 ($208 * 4,850)

Contribution margin $615,950 ($127 * 4,850)

Fixed costs 311,500

Net operating income $304,450

Contribution margin per unit = $127 ($335 - $208)

Contribution margin ratio = 0.379

For each dollar, $0.38 is left to cover fixed costs and contribute to operating income.

Fixed manufacturing costs

Taxes on factory $6,500

Factory maintenance 13,000

Factory machinery depreciation 73,000

Fixed selling and administrative costs

Lease of equipment for sales staff 13,000

Accounting staff salaries 63,000

Administrative management salaries 143,000

Total fixed costs $311,500