Question

The following costs result from the production and sale of 5,000 drum sets manufactured by Tight Drums Company for the year ended December 31, 2017. The drum sets sell for $350 each. The company has a 25% income tax rate.

Variable production costs
Plastic for casing $ 185,000
Wages of assembly workers 510,000
Drum stands 230,000
Variable selling costs
Sales commissions 175,000
Fixed manufacturing costs
Taxes on factory 5,000
Factory maintenance 10,000
Factory machinery depreciation 70,000
Fixed selling and administrative costs
Lease of equipment for sales staff 10,000
Accounting staff salaries 60,000
Administrative management salaries 140,000

Prepare contribution margin income statement for the company.

Answer 1

Answer and Explanation:

The preparation of the contribution margin income statement for the company is presented below:

Tight Drums Company

Contribution margin income statement

For the year ended December 31, 2017

Sales (5,000 drums × $350) $1,750,000

Less: Variable cost

Plastic for casing -$185,000

Wages of assembly workers $510,000

Drum stands $230,000

Variable selling costs

Sales commissions $175,000

Total variable cost -$1,100,000

Contribution margin $650,000

Less: Fixed cost

Fixed manufacturing costs

Taxes on factory $5,000

Factory maintenance $10,000

Factory machinery depreciation $70,000

Fixed selling and administrative costs

Lease of equipment for sales staff $10,000

Accounting staff salaries $60,000

Administrative management salaries $140,000

Total fixed cost -$295,000

Net operating income $355,000

Less: income tax expense at 25% -$88,750

Net income $266,250

We simply deduct the variable cost and fixed cost from the sales revenue so that the net operating income could come and then deducted the income tax expense so that net income could arrive