Question

Contribution Margin Willie Company sells 29,000 units at $22 per unit. Variable costs are $17.60 per unit, and fixed costs are $38,300. Determine (a) the contribution margin ratio, (b) the unit contribution margin, and (c) operating income.

Answer 1

Solution:

(a)The formula for calculating the contribution margin ratio is

= (Total sales – Total Variable costs) / Total sales

As per the information given in the question we have

Selling price per unit = $ 22    ;     No. of units sold = 29,000

Thus total sales = Selling price per unit * No. of units sold

= $ 22 * 29,000 = $ 638,000

Variable cost per unit = $ 17.60   ;    No. of units sold = 29,000

Thus total variable costs = Variable cost per unit * No. of units sold

= $ 17.60 * 29,000 = $ 510,400

Applying the above information in the contribution margin ratio we have

= ( $ 638,000 - $ 510,400 ) / $ 638,000

= $ 127,600 / $ 638,000

= 0.20

= 20 %

Thus the contribution margin ratio = 0.20 = 20 %

(b)The formula for calculating the unit contribution margin is

= Selling price per unit – Variable cost per unit

As per the information given in the question we have

Selling price per unit = $ 22    ;      Variable cost per unit = $ 17.60

The contribution margin is = $ 22 – $ 17.60

= $ 4.40

Thus the unit contribution margin = $ 4.40

(c) The operating income can be calculated as follows :

= Total Sales – Variable costs – Fixed Costs

As per the information given in the question we have

Total sales = $ 638,000   ; Total variable costs = $ 510,400   ;   Fixed costs = $ 38,300

Applying the available information in the formula we have :

Thus the operating income = $ 638,000 - $ 510,400 - $ 38,300

= $ 89,300

Thus we have

(a) The contribution margin ratio = 0.20 = 20 %

(b) The unit contribution margin = $ 4.40

(c) Operating income = $ 89,300