Question

Kevin Hall recently fulfilled his long-time dream of opening a gym that offers spinning exercise classes for $10 per person. To differentiate his gym and better serve his clients, Kevin provides a towel, a bottle of water, and an after-workout protein shake to each person participating in a class, at a cost of $1.96 per person. Kevin employs four part-time instructors and pays them each $3,100 per month. He also pays himself a monthly salary of $7,600. Kevin's other monthly costs are $3,600 for rent, $2,300 for depreciation on his 32 bikes, and $1,925 in utilities and insurance. (a) What is Kevin's contribution margin per unit? (Round answer to 2 decimal places, e.g. 52.75.) Contribution margin $ per unit (b) What is Kevin's contribution margin ratio? (Round answer to 2 decimal places, e.g. 52.75.) Contribution margin ratio %

Answer 1

a) Contribution Margin per unit = Selling Price per unit - Variable Cost per unit

= 10 - 1.96

= $8.04

b) Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit * 100

= 8.04 / 10 * 100

= 80.40%

c) Contribution Format Income Statement:

Particulars	$	$	Per Unit
Selling Price (6,100*10)		61,000	10
Less: Variable Cost (6,100*1.96)		11,956	1.96
Contribution Margin		49,044	8.04
Less: Fixed Costs:
Part Time Instructors' Salary (3,100*4)	12,400
Kevin's Salary	7,600
Rent	3,600
Depreciation	2,300
Utilities & Insurance	1,925
Total Fixed Costs		27,825
Net Profit / Income		21,219