Question

Doran Products had costs of $950,000 when sales equaled 55,000 units. When sales increased to 85,000 units, total costs increased to $1,400,000. The selling price is $21 per unit.

Required:

(a.) Determine the fixed and variable portions of costs.
(b.) Prepare a contribution margin income statement for a month with sales of 70,000 units.

Answer 1

(a). The fixed and variable portions of costs.

Variable cost per unit = Change in costs / Change in units

= [$14,00,000 – 950,000] / [85,000 Units – 55,000 Units]

= $450,000 / 30,000 Units

= $15 per unit

Fixed Costs = Total Costs – Variable Costs

= $950,000 – [55,000 Units x $15 per unit]

= $950,000 – 825,000

= $125,000

Variable Cost = $15 per unit

Fixed Cost = $125,000

(b). The contribution margin income statement for a month with sales of 70,000 units.

Contribution Margin Income Statement
Sales [70,000 x $21]	$14,70,000
Less: Variable Costs [70,000 x $15]	10,50,000
Contribution Margin	420,000
Less: Fixed Costs	125,000
Net Operating Income	295,000