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Accounting: Contribution Margin Format

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ABC Electronics manufactures Blue-Ray drive, which has a fixed manufacturing
overhead budget for year 20X3 of \$2,000,000. The sales of Blue-Ray drive are expected to be
500,000 units for the year. All variable manufacturing costs are expected to be \$8 per unit.
The company has budgeted \$5,000,000 for selling and administrative expenses and of which,
40% of them are variable expenses. The sale price of the Blue-Ray drive will be \$30 each.

(1) Prepare a budgeted income statement for the year in contribution form ignoring income
taxes.
(2) If a computer manufacturer offers to buy 200,000 units of Blue-Ray drive for \$2 million
on a one-time special order. Assume that ABC Electronics has enough manufacturing
capacity for the order and there will be no selling and administrative cost incurred.
However, a special commission of 5% of the sales of this special order will apply. Should
the company take this special order?
(3) For the special order in (2), if ABC Electronics only has extra capacity of 100,000 units
and the additional 100,000 units need to be subcontracted for \$15 each, should the
company take this special order?
(4) For the special order in (3), what is the highest subcontract price that the company can
accept so that the company will not lose money on this special order?

Solution Summary

The problem set deals with issues under accounting: Income statement, Contribution margin format.

\$2.19

Prepare an income statement in the contribution margin format

Shown below is an income statement in the traditional format for a firm with a sales volume of 20,000 units.

Revenues \$160,000
Cost of goods sold (\$16,000 + \$3.20/unit) 80,000
Gross profit \$80,000
Operating expenses:
Selling (\$4,500 + \$1.40/unit) 32,500
Operating income \$20,000

Please proceed to the "Analysis" worksheet and complete the basic problem requirements. Complete the problem
requirements by entering appropriate amounts or formulas in shaded worksheet cells:

a. Prepare an income statement in the contribution margin format.
b. Calculate the contribution margin per unit and the contribution margin ratio.

After completing the "Analysis" worksheet, please proceed to the "What the Numbers Mean" worksheet and respond
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Work in Process Finished Goods Cost of Goods Sold
Beginning Inventory (BI): 0 BI: 0
Raw Material Used: - CGM - - CGS -
Direct Labor Cost:

Ending Inventory (EI): 0

Cost of goods manufactured: \$-
Number of units produced: Number of units sold:

Cost per unit:

Complete the Modeling:
Gravois Inc.
Income Statement
For the Month of June

Sales
Cost of goods sold
Gross profit