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Contribution margin income statement and ratio

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.

Analysis Component.
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

Fixed selling and administrative costs
Lease of equipment for sales staff 20,000
Accounting staff salaries 70,000
Administrative management salaries 250,000

(check figure to see if on right track with all calculations; Net income = $202,500)

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Solution Summary

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.

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