Question

Variable Costs, Contribution Margin, Contribution Margin Ratio

Super-Tees Company plans to sell 10,000 T-shirts at $18 each in the coming year. Product costs include:

Direct materials per T-shirt	$6.30
Direct labor per T-shirt	$1.26
Variable overhead per T-shirt	$0.54
Total fixed factory overhead	$38,000

Variable selling expense is the redemption of a coupon, which averages $0.90 per T-shirt; fixed selling and administrative expenses total $11,000.

Required:

1. Calculate the following values:
Round dollar amounts to the nearest cent and round ratio values to three decimal places (express the ratio as a decimal rather than a percentage).

a. Variable product cost per unit	$
b. Total variable cost per unit	$
c. Contribution margin per unit	$
d. Contribution margin ratio
e. Total fixed expense for the year	$

2. Prepare a contribution-margin-based income statement for Super-Tees Company for the coming year. If required, round your per unit answers to the nearest cent.

Super-Tees Company
Contribution-Margin-Based Operating Income Statement
For the Coming Year
	Total	Per Unit
	$	$
	$	$
	$

3. What if the per unit selling expense increased from $0.90 to $1.95? Calculate new values for the following:
Round dollar amounts to the nearest cent and round ratio values to four decimal places (express the ratio as a decimal rather than a percentage):

a. Variable product cost per unit	$
b. Total variable cost per unit	$
c. Contribution margin per unit	$
d. Contribution margin ratio
e. Total fixed expense for the year	$

Answer 1

1)

a)	Computation of Variable Product Cost
	Direct Materials		$      6.30
	Direct Labor		$      1.26
	Variable OH		$      0.54
			$      8.10

b)	Computation of Total Variable Cost
	Direct Materials		$      6.30
	Direct Labor		$      1.26
	Variable OH		$      0.54
	Variable S&A Expense		$      0.90
			$      9.00

c)	Selling Price per unit			$        18.00
	Total variable cost per unit			$           9.00
	Contribution Margin per unit			$           9.00
d)	Contribution Margin Ratio =			Cont. Margin per unit / Selling Price per unit
			=	$ 9 / $ 18
			=	50%
e)	Computation of Total Fixed Cost Expense
	Total fixed factory overhead			$ 38,000.00
	Fixed S&A expenses			$ 11,000.00
				$49,000.00

2)
	Contribution Margin Based Income Statement
	Sales Revenue		($ 18 x 10000)		$ 180,000.00
Less:	Variable Expenses		($ 9 x 10000)		$   90,000.00
	Contribution Margin				$   90,000.00
Less:	Fixed Expenses				$   49,000.00
	Net Operating Income				$   41,000.00

3)

a)	Computation of Variable Product Cost
	Direct Materials		$      6.30
	Direct Labor		$      1.26
	Variable OH		$      0.54
			$      8.10

b)	Computation of Total Variable Cost
	Direct Materials		$      6.30
	Direct Labor		$      1.26
	Variable OH		$      0.54
	Variable S&A Expense		$      1.95
			$   10.05

c)	Selling Price per unit			$            18.00
	Total variable cost per unit			$            10.05
	Contribution Margin per unit			$               7.95
d)	Contribution Margin Ratio =			Cont. Margin per unit / Selling Price per unit
			=	$ 7.95 / $ 18
			=	44%
e)	Computation of Total Fixed Cost Expense
	Total fixed factory overhead			$     38,000.00
	Fixed S&A expenses			$     11,000.00
				$    49,000.00