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Chapter 20: Q4SE (page 1121)

Calculating contribution margin

Glenn Company sells a product for \(80 per unit. Variable costs are \)60 per unit, and fixed costs are $800 per month. The company expects to sell 560 units in September. Calculate the contribution margin per unit, in total, and as a ratio.

Short Answer

Expert verified
  1. Contribution margin per unit=$20
  2. Contribution margin in total = $11,200
  3. Contribution margin ratio = 25%

Step by step solution

01

Calculation of contribution margin per unit

Contributionmarginperunit=Salespriceperunit-variablecostperunit=$80-$60=$20

02

Calculation of contribution margin in total

Contributionmarginintotal=Totalsalesinunits×contributionmarginperunit=560Units×$20=$11,200

03

Calculation of contribution margin ratio

Contributionmarginratio=ContributionmarginNetsalesrevenue=$11,200$44,800=25%

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Most popular questions from this chapter

Diversified Investor Group is opening an office in Boise, Idaho. Fixed monthly costs are office rent (\(8,000), depreciation on office furniture (\)1,700), utilities (\(2,400), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)11,900). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements

  1. Use the contribution margin ratio approach to compute Diversified’s breakeven revenue in dollars. If the average trade leads to \(800 in revenue for Diversified, how many trades must be made to break even?
  2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)11,200.
  3. Graph Diversified’s CVP relationships. Assume that an average trade leads to \(800 in revenue for Diversified. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)11,200 is earned.
  4. Suppose that the average revenue Diversified earns increases to $2,000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

Question: Gilbert’s Steel Parts produces parts for the automobile industry. Thecompany has monthly fixed costs of \(640,220 and a contribution margin of85% of revenues.

Requirements

1. Compute Gilbert’s monthly breakeven sales in dollars. Use the contributionmargin ratio approach.

2. Use contribution margin income statements to compute Gilbert’s monthlyoperating income or operating loss if revenues are \)500,000 and if they are$1,050,000.

3. Do the results in Requirement 2 make sense given the breakeven sales youcomputed in Requirement 1? Explain.

What is target profit?

Question: Determining total mixed cost

John Street Barber Shop pays \(25 per month for water for the first 8,000 gallons and \)3.50 per thousand gallons above 8,000 gallons. Calculate the total water cost when the barber shop uses 7,000 gallons, 10,000 gallons, and 13,000 gallons.

Question: Computing contribution margin in total, per unit, and as a ratio

Complete the table below for contribution margin per unit, total contribution margin, and contribution margin ratio:

A B C Number of units 1,720 units 14,920 units 4,620 units

Sales price per unit \( 1,800 \) 4,500 $ 5,550

Variable costs per unit 720 3,600 1,665

Calculate:                  

Contribution margin per unit                      

Total contribution margin                        

Contribution margin ratio
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