Exercise 6-6 Examining Cost Behaviour and Contribution Margin (LO1 - CC1, 3; LO2

Question

Exercise 6-6 Examining Cost Behaviour and Contribution Margin (LO1 - CC1, 3; LO2 - CC7; LO3 - CC12) Bikes Manufacturing produces and sells children's bikes at an average price of $80. Its costs are as follows: direct materials, $14, direct labour, $8; variable overhead, $3; sales commission, 10% of price. Its fixed monthly costs are $42,000 Required 1. Using the above cost data, set up a monthly cost equation. Y= 2. What is the company's contribution margin percentage? (Round your answer to 2 decimal places.) Contribution margin

Explanation / Answer

Variable cost is a cost that varied with level of output. fixed cost that remain same irrespective of level of output

sales commission :80*10% = 8

Variable cost :14 direct material +8 direct labor +3 variable overhead +8 sales commission

       = $ 33 per unit

1)Y = fixed cost +(variable cost per unit *units sold)

    = 42000 + (33*x)

   = 42000+ 33x

2)Contribution margin ratio = (price -variable cost /price

            =(80- 33)/80

          = 47/80

          =.5875 or 58.75%

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