Question

Con Ram Industries incurs the following costs during the current year:

Depreciation of machinery………… $15,000
Direct labor……………………… 6,000
Direct materials…………………… 4,000
Executive salaries………………… 20,000
Insurance………………………… 2,000
Rent on building………………… 8,000
Factory supplies…………………… 10,000
Vehicle lease cost………………… 5,000
Sales for the year were $80,000 and Con Ram determined that only the direct production costs and factory supplies are to be classified as variable costs; all other costs are classified as fixed costs.

Con Ram sold 400 units. (a) Calculate the unit contribution margin and the contribution margin ratio for Con Ram Industries. (b) Con Ram Industries is considering plans that would increase the contribution margin ratio for next year. Should it pursue these plans? Explain.

Answer 1

SALES $80,000

LESS DIRECT LABOR ($6,000)

DIRECT MATERIAL ($4,000)

FACTORY SUPPLIES ($10,000)

CONTRIBUTION $60,000

1. UNIT CONTRIBUTION = $60,000 / 400 UNITS = $150 PER UNIT

CONTRIBUTION MARGIN RATIO = $60,000 / $80,000 * 100 = 75%

2. SINCE THE OVERALL PROFIT IS $10,000 ( CONTRIBUTION $60,000 - FIXED COST $50,000 (REMAINING COST ), AND SINCE VON RAM INDUSTRIES IS CONSIDERING PLANS TO INCREASE CONTRIBUTION MARGIN.

CON RAM INDUSTRIES SHOULD DEFINITELY CONSIDER THESE PLANS.