Question

Framar, Inc., manufactures machinery to customer specifications. It operated at about 75% of practical capacity during the year. The operating results for the most recent fiscal year are presented below. Framar, Inc. Income Statement For the Year Ended September 30 (000 omitted) Sales $25,000 Minus: Sales commissions (2,500) Net sales $22,500 Expenses Direct materials $  6,000 Direct labor 7,500 Manufacturing O/H-variable Supplies $   625 Indirect labor 1,500 Power 125 2,250 Manufacturing O/H-fixed Supervision $   500 Depreciation 1,000 1,500 Corporate administration 750 Total expenses $18,000 Net income before taxes $  4,500 Income taxes (40%) (1,800) Net income $  2,700

Top management has developed the pricing formula presented below. It is based upon the operating results achieved during the most recent fiscal year. The relationships used in the formula are expected to continue during the next fiscal year. The company expects to operate at 75% of practical capacity during the next fiscal year. APA, Inc., has asked Framar to bid on some custom-designed machinery. Framar used the formula to develop a price and submitted a bid of $165,000. The calculations are given next to the pricing formula shown below. Details of Formula APA Bid Calculations Estimated direct materials cost $XXX $  29,200 Estimated direct labor cost XXX 56,000 Estimated manufacturing O/H calculated at 50% of DL XXX 28,000 Estimated corporate O/H calculated at 10% of DL XXX 5,600 Estimated total costs excluding sales commissions $XXX $118,800 Add 25% for profits and taxes XXX 29,700 Suggested price (with profits) before sales commissions $XXX $148,500 Suggested total price equal to suggested price divided by .9 to adjust for 10% sales commissions $XXX $165,000

Question

What is the contribution margin if the bid is accepted?

• A.$102,000

• B.$63,300

• C.$27,900

• D.$46,500

Answer 1

Calculate contribution margin if bid is accepted
Contribution margin	Sales revenue - Variable costs
Sales revenue		$165,000
Less: Variable costs
Direct material costs	$29,200
Direct labor costs	$56,000
Sales commission (165000-148500)	$16,500
Total variable costs		$101,700
Contribution margin		$63,300
Thus, if bid is accepted contribution margin is $63,300