Question

Bikes Manufacturing produces and sells children’s bikes at an average price of $125. Its costs are as follows: direct materials, $11; direct labour, $7; variable overhead, $3; sales commission, 4% of price. Its fixed monthly costs are $46,000.

Required:

1.	Using the above cost data, set up a monthly cost equation.
	Y=______+______x

2.	What is the company’s contribution margin percentage? (Round your answer to 2 decimal places.)

Answer 1

Direct materials = $11

Direct labor = $7

Variable overhead = $3

sales commission = 4% of price

= 125 x 4%

= $5

Variable cost per unit = Direct materials+Direct labor + Variable overhead + sales commission

= 11+7+3+5

= $26

fixed cost = $46,000

1.

Cost equation

Y = Fixed cost + Variable cost X

Y = 46,000 + 26 x Number of bikes

2.

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 125-26

= $99

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= 99/125

= 79.20%

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