Question

What is the incremental contribution margin that this company will have if it increases its production and sales from 5,000 units to 5,001 units? Use the following cost structure.

	Per Unit	Per Period
Sales price	$35
Direct material costs	$6.20
Direct labor cost	$3.10
Variable manufacturing overhead	$1.35
Fixed manufacturing overhead		$14,000
Sales commissions	$1.50
Variable administrative expense	$0.40
Fixed selling and administrative expense		$4,500

a. 22.85

b. 22.45

c. 21.55

d. 24.35

Answer 1

b. 22.45

Explanation

Computation of incremental contribution margin:

Particular	Sales (5,000 units)	Sales (5,001 units)
Sales ($35*5,000 units) ($35*5,001 units)	$175,000	$175,035
Less: Variable cost* ($12.55*5,000 units) ($12.55*5,001 units)	62,750	62,762.55
Contribution margin	$112,250	$112,272.45

Incremental contribution margin = $22.45

($112,250-$112,272.45)

*Computation of variable cost per unit

Direct material cost	$6.20
Direct labor cost	3.10
Variable manufacturing overhead	1.35
Sales commission	1.50
Variable administrative expense	0.40
Variable cost per unit	$12.55

Note: Sales commission is given per unit hence, it has been considered as Variable cost

Alternatively,

Incremental contribution margin = ($35 - $12.55)

= $22.45

Thank you :)