Purchase Solution

Contribution Margin(CM) Income statement and CM Ratio

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1. Bloom Company management predicts that it will incur fixed costs of \$160,000 and earn pretax income of \$164,000 in the next period. Its expected contribution margin ratio is 25%. Use the information to compute the amounts of (1) total dollar sales and (2) total variable costs.

2. The following costs result from the production and sale of 1,000 drum sets manufactured by Tom Thompson Company for the year ended December 31, 2008. The drum sets sell for \$500 each. The company has a 25% income tax rate.

Variable production costs
Plastic for casing \$17,000
Wages of assembly workers 82,000
Drum stands 26,000
Variable selling costs
Sales commission 15,000
Fixed Manufacturing costs
Taxes on factory 5,000
Factory maintenance 10,000
Factory machinery depreciation 40,000
Lease of equipment for sales staff 10,000
Accounting staff salaries 35,000

Required:
1. Prepare a contribution margin income statement for the company
2. Compute its contribution margin per unit and its contribution margin ratio

Solution Summary

There are two problems. Solution to first problem explains the steps to find out sales and total variable costs. Solution to second problem depicts the methodology to make contribution margin income statement for the given firm.

Solution Preview

Please refer attached file for better clarity of tables and calculations.

Solution 1.
Fixed costs=160,000
Pretax income=164,000
CM ratio= 25%
Total dollar sales=(Fixed costs+Pretax income)/CM ratio=1,296,000
Variable costs=Sales-Fixed costs-Pretax income=972,000

Solution 2.

Contribution margin income statement

Sales (1000 units@\$500 each) 500,000
Less Variable Costs ...

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• BEng (Hons) , Birla Institute of Technology and Science, India
• MSc (Hons) , Birla Institute of Technology and Science, India
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