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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
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

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.

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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.

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See Also This Related BrainMass Solution

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

Required:
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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