Question

Orion company sells several products. information of average revenue and costs is as follows: selling price per unit $23 variable costs per unit: direct material $4 direct manufacturing labor $1.70 manufacturing overhead $0.40 selling costs $2 annual fixed costs $100,000 the company sells 12,000 units at the end of the year. if direct labor and direct material costs increase by $1 each, contribution margin ________. select one:
a. increases by $24,000

b. increases by $12,000

c. decreases by $24,000

d. decreases by $12,000

Answer 1

C. Decrease by $24,000. Start by multiplying the selling price by the number of units sold, or $23/unit by 12,000 units, to get $276,000, or revenue. Then find the total variable expense costs by summing each variable cost per unit, for $8.10/unit. Multiply this by 12,000 units then subtract the variable cost and the fixed cost of $100,000 from the revenue, to get $78,800, or gross income.

Next, find the new gross income by adding $2.00 to the variable cost per unit, to get $10.10/unit and multiplying by 12,000 units and subtracting this variable cost and the fixed cost from the revenue to get $54,800.

To find the contribution margin, subtract the original gross income from the new gross income to get a decrease of $24,000.