Answer:
Tight Drums Company
1. Contribution Margin Income Statement for the year ended December 31, 2019:
Sales Revenue $1,350,000
Variable production costs:
Plastic for casing $121,500
Drum stands 162,000
Wages of assembly workers 414,000
Total variable prodn. costs $697,500
Variable selling costs :
Sales commissions 112,500
Total variable costs $810,000 810,000
Contribution $540,000
Fixed manufacturing costs:
Taxes on factory 15,000
Factory maintenance 30,000
Factory machinery depreciation 90,000
Total Manufacturing overhead $135,000 135,000
Fixed selling and administrative costs :
Lease of equipment for sales staff 30,000
Accounting staff salaries 80,000
Administrative management salaries 160,000
Total fixed selling and admin. costs $270,000 270,000
Operating Profit (Pre-Tax) Income $135,000
Income Tax Expense (Rate = 35%) 47,250
Net Income $87,750
2.Computation of Contribution Margin per unit and Contribution Margin Ratio:
a) Contribution Margin per unit
= Contribution Margin divided by Units sold
= $540,000/4,500
= $120 per unit
b) Contribution Margin Ratio
= Contribution per unit/Selling price * 100
= $120/$300 * 100
= 40%
3. For each dollar of sales, contribution per dollar
= 40% of $1
= $0.40
Explanation:
a) Data:
Sales = 4,500 drums
Selling price = $300 each
Sales Revenue = 4,500 x $300 = $1,350,000
Variable production costs:
Plastic for casing $121,500
Drum stands 162,000
Wages of assembly workers 414,000
Total variable prodn. costs $697,500
Variable selling costs :
Sales commissions 112,500
Total variable costs $810,000
Fixed manufacturing costs:
Taxes on factory 15,000
Factory maintenance 30,000
Factory machinery depreciation 90,000
Total Manufacturing overhead $135,000
Fixed selling and administrative costs :
Lease of equipment for sales staff 30,000
Accounting staff salaries 80,000
Administrative management salaries 160,000
Total fixed selling and admin. costs $270,000
Income Tax Rate = 35%
b) Tight Drums Company's contribution margin income statement is a financial statement that separates all the variable costs from the fixed costs. The difference between Tight Drums' Sales Revenue of $1,350,00 and the Total Variable Costs of $810,000 is called the Contribution Margin.
The Contribution margin of $540,000 shows how much of the sales revenue is left to cover the fixed costs totalling $405,000 and generate operating income, after deducting all the variable costs.
This contribution margin can be expressed per unit by dividing the contribution margin of $540,000 by the 4,500 units sold. The per unit value can then be expressed as a ratio of the selling price. From the contribution margin ratio, we can estimate how much is left per dollar of sales for Tight Drums Company to cover its fixed costs and generate operating income.