Contribution Margin Income Statement

Essay by agunnUniversity, Master'sA, July 2007

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The following is a summary of Harry Huffnpuff Glassblowing business. The following assumptions are made to calculate the required financial statements. It is assumed that Harry works a 40-hour workweek, producing an average of five bundles of glass products a week for 40 weeks of the year. Total production for the year is 200 bundles sold at $680.00 each. Each bundle costs $80.00 to ship and takes two hours of Sam’s labor at $10.00 an hour. Sam works approximately 20 hours a week in addition to preparing shipments.

We begin by determining variable and fixed costs using the High-Low Method:ActivityCostHigh Level 6$3300Low level 4$23002$1000Variable costPer unit $500 ($1000/2)Variable costAt high level$3000Total costAt high level$3300Fixed costPer week $300With the above information, we derive the following in a Traditional andContribution Margin income statements:Harry Huffnpuff GlassblowingTraditional Income StatementRevenue$136,000Less cost of goods sold$136,000Gross Profit 0Marketing $6,050Net Income (Loss) ($6,050)Harry Huffnpuff GlassblowingContribution Margin Income StatementRevenue$136,000Variable Costs$120,000Contribution Margin $16,000Fixed Costs $22,050Net Income (Loss) ($6,050)Break Even PointTo calculate Harry’s Break Even Point we will use the following formula:Sales = Variable Expenses + Fixed Expenses + ProfitsSales = $680 per unitVariable Expenses:•$500 per unit•$80 Shipping•$20.00

Labor•= $600 total per unitFixed Expenses:•Cost of manufacturing: $300 X 40 weeks = $12,000•Marketing = $6,050•Labor $8000 ($10.00 an hour for 20 hours a week for 40 weeks)•Harry’s wages $34,722 ($25,000 after 28% tax rate = 25,000/.72)•= $60,722$680Q = $600Q + $60,722 + $0$80Q = $60,722Q = ~760 unitsRecommendationsHarry can do a myriad of things to better his situation. The first thing Harry should do is charge the customers for shipping. His products are in demand; therefore it should not be a problem tasking the customers with the shipment fee. The customers already mark the product up 100 to 200%, so this is definitely step number one. Secondly he should cut...