Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each.Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500.Selling and administrative costs are all fixed and totaled $24,000.Beginning inventory consists of no units.Brand Products uses variable costing.How much will the company's contribution margin increase if sales increase 10%?
A)$16,974
B)$23,000
C)$14,996
D)$12,420

Question

Quizplus · Accepted Answer

The contribution margin can be calculated as:
Contribution Margin = Sales - Variable Costs
Variable Costs = Direct Labor + Direct Materials + Variable Manufacturing Overhead
Variable Costs = $30,000 + $32,000 + $3,500
Variable Costs = $65,500

Contribution Margin = ($10 x 23,000) - $65,500
Contribution Margin = $230,000 - $65,500
Contribution Margin = $164,500

If sales increase by 10%, the new sales will be:
New Sales = 23,000 x 1.1
New Sales = 25,300

The new contribution margin can be calculated as:
New Contribution Margin = ($10 x 25,300) - $65,500
New Contribution Margin = $253,000 - $65,500
New Contribution Margin = $187,500

The increase in contribution margin will be:
Increase in Contribution Margin = New Contribution Margin - Contribution Margin
Increase in Contribution Margin = $187,500 - $164,500
Increase in Contribution Margin = $23,000

Therefore, the contribution margin will increase by $23,000 if sales increase by 10%. The correct answer is A.

Last Month, Brand Products Manufactured 25,000 Calculators and Sold 23,000