Question

PB2.

LO 3.1A company manufactures and sells blades that are used in riding lawnmowers. The 18-inch blade sells for $15 and has per-unit variable costs of $4 associated with its production. The company has fixed expenses of $85,000 per month. In January, the company sold 12,000 of the 18-inch blades.

Calculate the contribution margin per unit for the 18-inch blade.
Calculate the contribution margin ratio of the 18-inch blade.
Prepare a contribution margin income statement for the month of January.

Answer 1

The contribution margin per unit for the 18-inch blade.

Break even in units = Fixed cost/Contribution per unit

= 85,000/11 (15-4)

= 7,728 unit (round off)

The contribution margin ratio of the 18-inch blade.

Total contribution margin (CM) is calculated by subtracting total variable costs TVC from total sales TSP. Contribution margin per unit equals sales price per unit SP minus variable costs per unit VC . It is used in calculating a break even point of a business. Contribution margin ratio tells us how much contribution towards fixed cost is generate by selling a unit.

CM ratio = $ 11/ $ 15 *100= 73.33%

(Variable cost = 15 -4 = 11 )

Contribution margin income statement for the month of January.

Sales $ 180,000

Variable cost ($ 48,000)

Gross profit $ 132,000

Fixed Cost ($ 85,000)

Net Profit $ 47,000