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    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
    Fixed selling and administrative costs
    Lease of equipment for sales staff 10,000
    Accounting staff salaries 35,000
    Administrative management salaries 125,000

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

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    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 [email protected]$500 each) 500,000
    Less Variable Costs ...

    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.