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Financial & Managerial Accounting
Found in: Page 842
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

The following costs result from the production and sale of 12,000 CD sets manufactured by Gilmore Company for the year ended December 31, 2017. The CD sets sell for $18 each. The company has a 25% income tax rate.

Variable manufacturing costs

Plastic for CD Sets

$1,500

Wages of assembly workers

30,000

Labelling

3,000

Variable selling cost

Sales commission

6,000

Fixed manufacturing cost

Rent on factory

6,750

Factory cleaning services

4,520

Factory machine depreciation

20,000

Fixed selling and administrative cost

Lease of office equipment

1,050

System staff salaries

15,000

Administrative management salaries

120,000

Required

1. Prepare a contribution margin income statement for the company.

2. Compute its contribution margin per unit and its contribution margin ratio.

Analysis Component

3. Interpret the contribution margin and contribution margin ratio from part 2.

  1. The business entity is generating a net income of $6,135.
  2. Contribution margin per unit: $14.625, contribution margin ratio: 0.8125.
  3. $14.625 per unit is available from the sale of each unit to cover the fixed cost.
See the step by step solution

Step by Step Solution

Step 1: Definition of Pre-Tax Income

Before making the tax adjustments, a business entity's net income generated from its operations is known as pre-tax income. The tax expenses are calculated over this income only.

Step 2: Contribution margin income statement

Particular

Amount $

Amount $

Sales 12,000 CD sets @ $18 each

$216,000

Less: Variable cost

Plastic for CD Sets

$1,500

Wages of assembly workers

30,000

Labelling

3,000

Sales commission

6,000

(40,500)

Contribution margin

175,500

Less: Fixed cost

Rent on factory

6,750

Factory cleaning services

4,520

Factory machine depreciation

20,000

Lease of office equipment

1,050

System staff salaries

15,000

Administrative management salaries

120,000

(167,320)

Pre-tax income

8,180

Less: Income tax

(2,045)

Net income

$6,135

Step 3: Contribution margin per unit and ratio

Particular

Amount $

Sales price

$18

Less: Variable cost per unit

(3.375)

Contribution margin per unit

$14.625

Step 4: Interpretation of contribution margin per unit and ratio

The contribution margin per unit reflects that the sale of each unit generates $14.625 to cover the fixed cost of the business entity.

The contribution margin ratio reflects that 81.25% of total sales is available to cover the company’s fixed costs.

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