Question

Lasseter Corporation has provided its contribution format income statement for August. The company produces and sells a single product.

Sales (3,800 units)	$	95,000
Variable expenses		38,000
Contribution margin		57,000
Fixed expenses		43,600
Net operating income	$	13,400

If the company sells 3,900 units, its total contribution margin should be closest to:

	$13,753
	$57,000
	$58,500
	$59,500

Answer 1

Concepts and reason

CVP analysis: Cost-Volume-Profit (CVP) analysis is one of the techniques of decision accounting to achieve the targeted profits by changing different variables. The relationship between cost, profit and sales volume provides the basis for the manager to take effective steps about the future profits.

Contribution margin: The difference between the sales revenue and the variable costs is called contribution margin. This contribution margin can be determined in three forms: In total, per unit, and as a ratio. The management uses contribution margin to develop the weight of sales mix for multiple products. The contribution margin signifies the profit earned after deducting the fixed costs.

Fundamentals

Sales: The business activity or event of selling the merchandise inventory is known as selling.

Variable cost: These costs differ with the number of units produced or for the services provided. For example, the labor costs increase if the number of labor hours is increased, and the labor costs decrease if the number of labor hours is decreased.

Fixed cost: These are the costs which remain constant throughout the process of manufacturing or for the services rendered. They are incurred irrespective of number of units produced. For example, factory rent. The rent should be paid, if the factory produces 100 units or 1,000 units or if no units are produced.

Unit sales: Unit sale is measure used to determine the total sales that an organization makes in a particular reporting period. It is expressed as per-unit of output.

CVP is cost-volume-profit relationship. Use the following formula for CVP equation as below:

Contribution margin is determined as the difference between sales and variable cost. Use the following formula to determine the contribution margin:

Contribution margin per unit is determined by dividing contribution margin by number of units. Use the following formula to determine the contribution margin per unit:

Determine contribution margin per unit.

Determine contribution margin for 3,900 units.

Ans:

Contribution margin for 3,900 units is $58,500.