# Part two Problemsa. Calculate the contribution margin per unit

Part two Problemsa. Calculate the contribution margin per unit for Grade A mulch.

1. A company sells mulch by the cubic yard. Grade A much sells for $150 per cubic yard and has variable costs of $65 per cubic yard. The company has fixed expenses of $15,000 per month. In August, the company sold 240 cubic yards of Grade A mulch.

b. Calculate the contribution margin ratio of the Grade A mulch.

c. Prepare a contribution margin income statement for the month of August.

2. A company manufactures and sells blades that are used in riding lawnmowers. The 18-inch blade sells for $15 and has per-unit variable costs of $4 associated with its production. The company has fixed expenses of $85,000 per month. In January, the company sold 12,000 of the 18-inch blades.

a. Calculate the contribution margin per unit for the 18-inch blade.

b. Calculate the contribution margin ratio of the 18-inch blade.

c. Prepare a contribution margin income statement for the month of January.

4. West Island distributes a single product. The company’s sales and expenses for the month of June are shown. Using the information presented, answer these questions:

a. What is the break-even point in units sold and dollar sales?

b. What is the total contribution margin at the break-even point?

c. If West Island wants to earn a profit of $21,000, how many units would they have to sell?

d. Prepare a contribution margin income statement that reflects sales necessary to achieve the target profit.

5. Wellington, Inc., reports the following contribution margin income statement for the month of May. The company has the opportunity to purchase new machinery that will reduce its variable cost per unit by $10 but will increase fixed costs by 20%. Prepare a projected contribution margin income statement for Wellington, Inc., assuming it purchases the new equipment. Assume sales level remains unchanged.

6. Karen’s Quilts is considering the purchase of a new Long-arm Quilt Machine that will cost $17,500 and will increase her fixed costs by $119. What would happen if she purchased the new quilt machine to realize the variable cost savings of $5.00 per quilt, and what would happen if she raised her price by just $5.00? She feels confident that such a small price increase will not decrease the sales in units that will help her offset the increase in fixed costs. Given the following current prices how would the break-even in units and dollars change? Complete the monthly contribution margin income statement for each of these cases.

7. Abilene Industries manufactures and sells three products (XX, YY, and ZZ). The sales price and unit variable cost for the three products are as follows: Their sales mix is reflected as a ratio of 4:2:1. Annual fixed costs shared by the three products are $345,000 per year.

a. What are total variable costs for Abilene with their current product mix?

b. Calculate the number of units of each product that will need to be sold in order for Abilene to break even.

c. What is their break-even point in sales dollars?

d. Using an income statement format, prove that this is the break-even point.

8. Tim-Buck-II rents jet skis at a beach resort. There are three models available to rent: Junior, Adult, and Expert. The rental price and variable costs for these three models are as follows: The current product mix is 5:4:1. The three models share total fixed costs of $114,750.

a. Calculate the sales price per composite unit.

b. What is the contribution margin per composite unit?

c. Calculate Tim-Buck-II’s break-even point in both dollars and units.

d. Using an income statement format, prove that this is the break-even point.

9. Fire Company is a service firm with current service revenue of $900,000 and a 40% contribution margin. Its fixed costs are $200,000. Ice Company has current sales of $420,000 and a 30% contribution margin. Its fixed costs are $90,000.

a. What is the margin of safety for Fire and Ice?

b. Compare the margin of safety in dollars between the two companies. Which is stronger?

c. Compare the margin of safety in percentage between the two companies. Now which one is stronger?

d. Compute the degree of operating leverage for both companies. Which company will benefit most from a 10% increase in sales? Explain why. Illustrate your findings in an Income Statement that is increased by 10%.

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