Question

Required information E5-4 and E5-5 [LO 5-1, 5-5) 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 0-1,500 units, and monthly production costs for the production of 1,200 units follow. Morning Dove's utilities and maintenance costs are mixed with the fixed components shown in parentheses. Production Costs Direct materials Direct labor Utilities ($150 fixed) Supervisor's salary Maintenance ($270 fixed) Depreciation Total Cost $ 2,900 7,100 550 3,500 520 750 E5-5 (Algo) Calculating Contribution Margin and Contribution Margin Ratio, Preparing Contribution Margin Income Statement [LO 5-5] 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 1,400 units. Complete this question by entering your answers in the tabs below.

Answer 1

Required 1:

Variable cost = Direct material + Direct labor + Utilities + Maintenance

= $2,900 + $7,100 + ($550 - $150) + ($520 - $270)

= $10,650

Variable cost per birdbath = $10,650 / 1,200 = $8.875

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $26 - $8.875

= $17.125

Contribution margin ratio = (Contribution margin per unit / Selling price per unit) * 100

= ($17.125 / $26) * 100

= 65.87%

Required 2: Contribution margin income statement:

Sales (1,400 * $26)	$36,400
(-) Variable cost:
Direct material (2,900 / 1,200) * 1,400	($3,383.33)
Direct labor (7,100 / 1,200) * 1,400	($8,283.33)
Utilities (400 / 1,200) * 1,400	($466.67)
Maintenence (250 / 1,200) * 1,400	($291.67)
Contribution margin	$23,975
(-) Fixed cost
Utilities	($150)
Maintenence	($270)
Supervisor salary	($3,500)
Depreciation	($750)
Net operating income	$19,305