Larimer Company Contribution Margin Break-Even Analysis with Variable Cost Ratios and Contribution Margin Income Statement Worked Solution

Suppose that Larimer Company sells a product for $24. Unit costs are as follows:

Direct materials………………………………………$4.98

Direct labor……………………………………………2.10

Variable factory overhead……………………………..1.00

Variable selling and administrative expense…………..2.00

Total fixed factory overhead is $26,500 per year, and total fixed selling and administrative expense is $15,260.

Required:

1. Calculate the variable cost per unit and the contribution margin per unit.

2. Calculate the contribution margin ratio and the variable cost ratio.

3. Calculate the break-even units.

4. Prepare a contribution margin income statement at the break-even number of units.

SOLUTION

1. Direct materials…………………………………….……………….……… $ 4.98

Direct labor………………………………………….……………….………. 2.10