Question

Schrute Farm Sales buys portable generators for $470 and sells them for $740. He pays a sales commission of 5% of sales revenue to his sales staff. Mr. Schrute pays $5,000 a month rent for his store, and also pays $2,200 a month to his staff in addition to the commissions. Mr. Schrute sold 600 generators in June. If Mr. Schrute prepares a contribution margin income statement for the month of June, what would be his contribution margin? O A $444,000 O B. $139,800 O C. $748.200 D. $304 200

Answer 1

Contribution Margin Income Statement for June is shown as follows:- (Amounts in $)

Sales Revenue (A) (600 generators*$740)		444,000
Variable Cost:
Variable Purchase cost (600 generators*$470)	282,000
Variable Selling cost ($444,000*5%)	22,200
Total Variable Cost (B)		304,200
Contribution Margin (C = A-B)		139,800
Fixed Cost:
Rent Expense	5,000
Fixed Commission Expense	2,200
Total Fixed Cost (D)		7,200
Net Income (C-D)		132,600

Therefore contribution margin for the month of June is $139,800. Hence the correct option is B) $139,800.

Working Notes:-

1) Variable cost is the cost which change in proportion to change in units sold. In the given case commission is paid at 5% of sales revenue and would be considered as variable selling cost (as it changes with change in sales revenue).