Question

1. The following costs result from the production and sale of 4,450 drum sets manufactured by Tight Drums Company for the year ended December 31, 2017. The drum sets sell for $295 each. The company has a 30% income tax rate.

Variable production costs
Plastic for casing	$	115,700
Wages of assembly workers		404,950
Drum stands		155,750
Variable selling costs
Sales commissions		106,800
Fixed manufacturing costs
Taxes on factory		14,500
Factory maintenance		29,000
Factory machinery depreciation		89,000
Fixed selling and administrative costs
Lease of equipment for sales staff		29,000
Accounting staff salaries		79,000
Administrative management salaries		159,000

Required:

1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.

2. Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $350 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $315,000, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $245 per 100 yards of XT rope.

1. Estimate Product XT’s break-even point in terms of sales units and sales dollars. (1 unit = 100 yards) (Do not round intermediate calculations.)

2. 3. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.

Answer 1

Contribution margin Income Statement
Sales		1312750
Variable Costs:
Plastic for casing	115700
Wages of assembly workers	404950
Drum stands	155750
Sales Commissions	106800
Total Variable costs		783200
Contribution margin		529550
Fixed Costs:
Taxes on factory	14,500
Factory maintenance	29,000
Factory machinery depreciation	89,000
Lease of equipment for sales staff	29,000
Accounting staff salaries	79,000
Administrative management salaries	159,000
Total Fixed costs		399,500
Pretax Income		130,050
Income tax		39015
Net Income		91,035
Contribution margin per unit	119	per drum sets
Contribution margin ratio	40.34	%