Question

Morning Dove Company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0-1,800 units, and monthly production costs for the production of 1,400 units follow. Morning Dove's utilities and maintenance costs are mixed with the fixed components shown in parentheses. Production Costs Total Cost Direct materials $ 2,500 Direct labor 7,300 Utilities ($120 600 fixed) Supervisor's salary 2,600 Maintenance ($270 490 fixed) Depreciation 900 Suppose it sells each birdbath for $26. Required: 1. Calculate the unit contribution margin and contribution margin ratio for each birdbath sold. 2. Complete the contribution margin income statement assuming that Morning Dove produces and sells 1,600 units.

Answer 1

Variable expense per units = [$2,500 + $7,300 + ($600 - $120) + ($490 - $270)] / 1,400 = $7.50

Total fixed cost = $120 + $2,600 + $270 + $900 = $3,890

1.

Contribution margin = $26 - $7.50 = $18.50

Contribution margin ratio = $18.50 / $26 = 71.15%

2.

Sales (1,600 X $26)	$41,600
Less: Variable cost ($7.5 X 1,600)	$12,000
Contribution margin	$29,600
Less: Fixed cost	$3,890
Net operating income	$25,710