Question

Suppose that Larimer Company sells a product for $24. Unit costs are as follows:

Direct materials $4.98
Direct labor 2.10
Variable factory overhead 1.00
Variable selling and administrative expense 2.00

Total fixed factory overhead is $26,500 per year, and total fixed selling and administrative expense is $15,260.

Requried:
a. Calculate the variable cost per unit and the contribution margin per unit.
b. Calculate the contribution margin ratio and the variable cost ratio.
c. Calculate the break-even units.

Answer 1

a)

Variable cost per unit=$10.08

Contribution per unit=$13.92

b)

Contribution margin ratio=58%

Variable cost ratio= 42%

c) Break-even units=3,000 units

Step-by-step explanation:

Variable cost per unit

= 4.98 + 2.10 + 1.00 + 2.00 = $10.08

Variable cost per unit=$10.08

Contribution per unit = Selling price per unit - Variable cost per unit

= 24 - 10.08 =13.92

Contribution per unit=$13.92

b)

Contribution margin ratio= contribution/selling price= 13.92/24 × 100=58%

Contribution margin ratio=58%

Variable cost ratio = variable cost/selling price= 10.08 /24× 100 = 42%

Variable cost ratio=42%

c)

Break-even units = Total general fixed cost/contribution per unit

= (26,500 + 15,260)/ 13.92 = 3000 units

Break-even units=3,000 units