Question 2

The following costs result from the production and sale of 1,000 drum sets manufactured by Tight Drums

Company for the year ended December 31, 2015. The drum sets sell for $500 each. The company has

a 25% income tax rate.

Variable production costs

Plastic for casing . . . . . . . . . . . . . . . . . . . . . . . $ 17,000

Wages of assembly workers . . . . . . . . . . . . . . 82,000

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Drum stands . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000

Variable selling costs

Sales commissions . . . . . . . . . . . . . . . . . . . . . . 15,000

Fixed manufacturing costs

Taxes on factory . . . . . . . . . . . . . . . . . . . . . . . 5,000

Factory maintenance . . . . . . . . . . . . . . . . . . . . 10,000

Factory machinery depreciation . . . . . . . . . . . 40,000

Fixed selling and administrative costs

Lease of equipment for sales staff. . . . . . . . . . 10,000

Accounting staff salaries . . . . . . . . . . . . . . . . . 35,000

Administrative management salaries . . . . . . . 125,000

Required

1. Prepare contribution margin income statement for the company.

2. Compute its contribution margin per unit and its contribution margin ratio.

Analysis Component

3. Interpret the contribution margin and contribution margin ratio from part 2.