Answer:
a) Contribution margin is $360,000 and Net income is $101,250.
b) The portion of sales revenue that is not used to pay variable costs is $360,000. That is, the portion of the sales revenue that is left to pay for fixed costs and make a profit is $360,000.
c) The percentage of sales revenue that is left after deducting all the variable costs is 72%. In other words, 72% of sales revenue is left to pay for fixed costs and make a profit.
Explanation:
These can be calculated as follows:
a) Prepare a contribution margin income statement
Tight Drums Company
Contribution margin income statement
For the year ended December 31, 2015
Particulars $ $
Sales revenue (1,000 * $500) 500,000
<u>Variable costs</u>
Plastic for casing (17,000)
Wages of assembly workers (82,000)
Drum stands (26,000)
Sales commissions <u> (15,000) </u>
Total variable cost <u> (140,000) </u>
Contribution margin 360,000
<u>Fixed costs</u>
Taxes on factory (5,000)
Factory maintenance (10,000)
Factory machinery depreciation (40,000)
Lease of equip. for sales staff (10,000)
Accounting staff salaries (35,000)
Admin. management salaries <u> (125,000) </u>
Total Fixed cost <u> (225.000) </u>
Income before tax 135,000
Tax (135,000 * 25%) <u> (33,750) </u>
Net income <u> 101,250 </u>
b) Interpret the contribution margin
Contribution margin is sales revenue minus total variable cost.
From part a, contribution of $360,000 therefore implies that the portion of sales revenue that is not used to pay the variable costs is $360,000.
That is, the portion of the sales revenue that is left to pay for fixed costs and make a profit is $360,000.
c) Interpret the contribution margin ratio
Contribution margin ratio = Contribution margin / Sales revenue = $360,000 / $500,000 = 0.72, or 72%
This implies that 72% of sales revenue is left after deducting all the variable cost. In other words, 72% of sales revenue is left to pay for fixed costs and make a profit.
