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Contribution Margin & Income Statement

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
Variable overhead 40
Variable selling and administrative 10

Fixed costs
Fixed manufacturing overhead 250,000
Fixed selling and administrative 100,000

Herrestad Company
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
Selling and administrative expenses 180,000
Net income $260,000

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.

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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.