Using the sample format, the vice president asks you to evaluate the operating performance for UFI for 2004 and 2005 by determining the variable cost per unit sold for each year.
Complete the contribution margin Excel spreadsheet.
Provide an explanation of your calculations in a memo to the vice president.
Variable cost is the cost which exactly varies with your level of production. Fixed cost is the cost which you have to incur whether you are operating the business or not.
Let me explain with simple example. You are hiring the factory building (rent being $10000 per month) and office building (rent being $5000 per month). You have recruited office staff (salaries being $8000 per month). This total of $23000 will be incurred by you whether you start manufacturing activity or not.
However, variable cost will be incurred in proportion to the number of units manufactured.
5 kgs of raw material required ...
The solution evaluates performance of UFI using the variable costs. Contribution margins in excel are calculated.