Question

Kenneth Clark recently fulfilled his long-time dream of opening a gym that offers spinning exercise classes for $10 per person. To differentiate his gym and better serve his clients, Kenneth provides a towel, a bottle of water, and an after-workout protein shake to each person participating in a class, at a cost of $1.91 per person. Kenneth employs four part-time instructors and pays them each $2,600 per month. He also pays himself a monthly salary of $7,100. Kenneth’s other monthly costs are $3,100 for rent, $2,050 for depreciation on his 34 bikes, and $1,800 in utilities and insurance.

(a) What is Kenneth’s contribution margin per unit? (Round answer to 2 decimal places, e.g. 52.75.)

Contribution margin

$enter Contribution margin in dollars per unit

per unit

(b) What is Kenneth’s contribution margin ratio? (Round answer to 2 decimal places, e.g. 52.75.)

Contribution margin ratio

enter Contribution margin ratio in percentages

%

(c) Prepare Kenneth’s monthly contribution format income statement. Assume that he teaches 5,600 clients. (Round per unit values to 2 decimal places, e.g. 52.75 and all other answers to 0 decimal places, e.g. 1,234.)

Answer 1

a) Selling price per unit (person) Less: Variable cost per unit (person) Contribution margin per unit (person) $10.00 $1.91 $8.09 b) Contribution margin ratio = Contribution margin per unit / Selling price per unit Contribution margin per unit (person) Selling price per unit (person) Contribution margin ratio $8.09 [As calculated in Part-(a)] $10.00 80.90% ($8.09 / $10.00 = 0.809 = 80.90%] Kenneth Clark Monthly contribution format income statement Sales revenue $56,000 (5600 clients x $10.00] Less variable costs $10,696 [5600 clients x $1.91] Contribution Margin $45,304 Less fixed costs: Monthly part-time instructors salary $10,400 [4 instructors x $2,600 each] Kenneth's monthly salary $7,100 Monthly rent $3,100 Monthly depreciation on bikes $2,050 Monthly utilities and insurance $1,800 Total fixed costs $24,450 Net Income $20,854