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# Contribution Margin & Income Statement

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Below find production and sales information for Herrestad Company.

Product information

Beginning inventory 0
Units produced 10,000

Units sold 8,000

Selling price per unit \$300
Variable costs per unit
Direct material 120
Direct labor 60

Fixed costs

Absorption Income Statement
For the period ending Dec. 31, 2011

Sales \$2,400,000
Cost of goods sold 1,960,000
Gross profit (margin) \$440,000
Net income \$260,000

Required:
Prepare a contribution margin (behavioral, variable) income statement for Herrestad Company. Prepare a second version assuming the selling price per unit increases to \$320 per unit.

Use the original information to:
Determine the number of units the company must sell to break even for the year?
Compute break even assuming direct materials cost increase from \$120 to \$140, but all information remains the same.

#### Solution Summary

Tutorial is in Excel (attached). Click in cells to see computations. The trick is to see how the contribution margin per unit (sales less variable cost) change and how this changes breakeven. This is shown for you in Excel. The cells are linked so you have a model to use for other similar problems.

\$2.19

## Bloom Co: sales, variable costs; Tom Thompson: contribution margin income statement

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