Problem 5-1A:

1. A contribution margin income statement:

Particulars Amounts ($) Amounts ($)

Selling prices ($500 x 2.000 units) $1.000.000
 Variable costs:
          Plastic for casing $34.000
          Assembly worker wages $164.000
          Drum stands $52.000
          Sales commissions $30.000
-> Total variable costs $280.000

Contribution margin $720.000

Fixed costs:
    Taxes on factory $10.000
    Factory maintenance $20.000
    Factory machinery depreciation $80.000
    Sales equipment lease $20.000
    Accounting staff salaries $70.000
    Administrative management salaries $250.000
-> Total fixed costs $450.000
Pretax income  $270.000
Income tax (25%) $67.500
Net income $202.500

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

 Contribution margin per unit = Selling price - Variable cost

    = $500 - ($280.000 / 2.000)

    = $360

 Contribution margin ratio = Contribution margin per unit / Selling price

         = $360 / $500

        = 72%

3. Interpret the contribution margin and the contribution margin ratio:

 The contribution margin ($720.000) shows the difference between selling
prices and its variable costs. 
 The contribution margin ratio is 72%, this reveals that for each unit sold,
Harris Drum Company has $360 that contributes to covering fixed cost and
profit. If we consider sales in dollars, a contribution margin of 72% implies that
for each $1 in sales, this company has $0.72 that contributes to fixed cost and
profit.

5-2A:

1. Estimate Product HG’s break-even point in terms of (a) sales units and
(b) sales dollars.
a. Break - even point (sales in units):
 The contribution margin per unit = $200 - $170 = $30

 Break - even point (sale in units) = $330.000 / $30 = $11.000

b. Break - even point (sales in dollars) = $11.000 x $200 = $2.200.000

2. Prepare a CVP chart for Product HG like that in Exhibit 5.14. Use
20,000,000 yards as the maximum number of sales units on the
horizontal axis of the graph, and $4,000,000 as the maximum dollar
amount on the vertical axis.
 3. Prepare a contribution margin income statement showing sales,
variable costs, and fixed costs for Product HG at the break-even point.

Particulars Amounts ($)

Selling prices $2.200.000
Variable costs (11.000 units at $170 $1.870.000
each)
Contribution margin $330.000
Fixed costs $330.000
Net income $0