The following costs result from the production and sale of 2,000 drums sets manufactured by Harris Drum Company for the year ended December 31, 2009. The drum sets sell for $500 each. The company has a 25% income tax rate.
1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.
3. Interpret the contribution margin and contribution margin ratio from #2 above.
Variable production costs
Plastic for casing $ 34,000
Wages for assembly workers 164,000
Drum stands 52,000
Variable selling costs
Sales commissions $30,000
Fixed manufacturing costs
Taxes on Factory $10,000
Factory maintenance 20,000
Factory machinery depreciation 80,000
(check figure to see if on right track with all calculations; Net income = $202,500)
Given a company's fixed and variable costs, selling price per unit and number of units sold, this solution illustrates how to prepare a contribution margin income statement for the company, compute its contribution margin per unit and its contribution margin ratio, and interpret the contribution margin and contribution margin ratio.