Question

E5-16 Calculating Contribution Margin and Contribution Ratio, Preparing Contribution Margin Income Statement [LO 5-5] Riverside Inc. makes one model of wooden canoe. Partial information for it follows: 550 750 900 Number of Canoes Produced and Sold Total costs Variable costs Fixed costs Total costs Cost per unit Variable cost per unit Fixed cost per unit Total cost per unit $107,250 247,500 $354,750 $ 146,250 247,500 $ 393,750 $ 175,500 247,500 $423,000 $ $ 195.00 450.00 $ 645.00 195.00 330.00 525.00 $ 195.00 275.00 $ 470.00 $ Riverside sells its canoes for $750 each. Next year Riverside expects to sell 1,000 canoes. Required: Complete the Riverside's contribution margin income statement for each independent scenario. Assuming each scenario is a variation of Riverside's original data. (Round your unit contribution margin and contribution margin ratio to two decimal places (i.e. .1234 should be entered as 12.34%) and all other answers to the nearest dollar amount.) Scenario 1 Raises Sales Price to $850 per Canoe Scenario 2 Increase Sales Price and Variable Cost per Unit by 10 Percent Scenario 3 Decrease Fixed Cost by 20 Percent Unit Contribution Margin Contribution Margin Ratio Contribution Margin Income Statement Contribution Margin Net Operating Income

Answer 1

Answer:

Scenario 1 = Selling Price per unit is $850 per Canoe

Scenario 2 = Sales price and variable cost per unit are increased by 10%

                     So Revised Sales price = $750 * 110% = $825

                          Revised Variable cost per unit = $195 * 110% = $214.5

Scenario 3 = Decrease of Fixed cost by 20%

                      Revised Fixed Cost = $247,500 * 80% = $198,000

Unit Contribution Margin = Selling price per unit - Variable cost per unit

Unit Contribution Margin in Scenario 1 = $850 - $195 = $655 per unit

Unit Contribution Margin in Scenario 2 = $825 - $214.5 = $610.5 per unit

Unit Contribution Margin in Scenario 3 = $750 - $195 = $555 per unit

Contribution Margin ratio = (Contribution Margin per unit / Sale price per unit) * 100

Contribution Margin ratio in Scenario 1 = ($655 / $850) * 100 = 77.05%

Contribution Margin ratio in Scenario 2 = ($610.5 / $825) *100 = 74%

Contribution Margin ratio in Scenario 3 = ($555 / $750) * 100 = 74%

		Scenario 1 Raises Sales Price to $850 per Canoe		Scenario 2 Increases Sales Price and Variable Cost per unit by 10 Percent		Scenario 3 Decrease Fixed cost by 20 Percent
	Unit Contribution Margin	$655 per unit		$610.5 per unit		$555 per unit
	Contribution Margin Ratio	77.05%		74%		74%
	Contribution Margin Income Statement
A	Sales (Units)	1,000		1,000		1,000
	Selling Price per unit	$850		$825		$750
	Less: Variable Cost per unit	($195)		($214.5)		($195)
B	Contribution Margin Per Unit	$655		$610.5		$555
C	Contribution Margin (A * B)	$655,000		$610,500		$555,000
D	Less: Fixed Cost	($247,500)		($247,500)		($198,000)
E	Net Operating Income ( C - D )	$407,500		$363,000		$357,000