Question

The following income statements are provided for Li Company's last two years of operation: Year 1 Year 2 Number of units produced and sold 4,500 4,100 Sales revenue $ 69,750 $ 63,550 Cost of goods sold 41,700 38,000 Gross margin 28,050 25,550 General, selling, and administrative expenses 17,500 16,300 Net income $ 10,550 $ 9,250 Assuming that cost behavior did not change over the two-year period, what is Li Company's contribution margin in Year 2?

Answer 1

Answer:

$13,325

Explanation:

Calculation to determine Li Company's contribution margin in Year 2

First step is to calculate the Variable cost per unit

Using this formula

Variable cost per unit = Change in costs ÷ Change in activity Cost of goods sold

Let plug in the formula

Variable cost per unit = (41,700 − 38,000) ÷ (4,500 units − 4,100 units)

Variable cost per unit =3,700/400

Variable cost per unit = $9.25 per unit

Second step is to calculate the Selling and administrative expense

Variable cost per unit = (17,500- 16,300) ÷ (4,500 units − 4,100 units)

Variable cost per unit =1,200/400 units

Variable cost per unit = $3.00 per unit

Now let calculate the Contribution margin in Year 2

Using this formula

Contribution margin = Sales revenue − Variable costs

Let plug in the formula

Contribution margin= $ 63,550 − [4,100 units × ($9.25 per unit + $3.00 per unit)]

Contribution margin=$ 63,550-(4,100 units×$12.25)

Contribution margin=$ 63,550-$50,225

Contribution margin = $13,325

Therefore Li Company's contribution margin in Year 2 is $13,325