The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}
&\text { Year 1}&\text { Year 2}\
\text { Number of units produced and sold } & 3,500 & 3,000 \
\text { Sales revenue } & \$ 101,500& \$ 87,000 \
\text { Cost of goods sold } & 68,000& 60,000 \
\text { Gross margin } & 33,500& 27,000 \
\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \
\text { Net income } & \$ 20,500 & \$ 15,000
\end{array}$ Assuming that cost behavior did not change over the two-year period,what is Li Company's contribution margin in Year 2?
A) $33,000
B) $32,000
C) $39,000
D) $69,000

Question

The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}
&\text { Year 1}&\text { Year 2}\
\text { Number of units produced and sold } & 3,500 & 3,000 \
\text { Sales revenue } & \$ 101,500& \$ 87,000 \
\text { Cost of goods sold } & 68,000& 60,000 \
\text { Gross margin } & 33,500& 27,000 \
\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \
\text { Net income } & \$ 20,500 & \$ 15,000
\end{array}$  Assuming that cost behavior did not change over the two-year period,what is Li Company's contribution margin in Year 2?
A) $33,000
B) $32,000
C) $39,000
D) $69,000

Quizplus · Accepted Answer

The contribution margin is calculated as Sales Revenue minus Variable Costs. Assuming cost behavior did not change, the variable cost per unit is the same in both years. In Year 1, the variable cost per unit is ($68,000 / 3,500 units) = $19.43 per unit. In Year 2, the variable costs are $19.43 * 3,000 units = $58,290. The contribution margin in Year 2 is $87,000 (Sales Revenue) - $58,290 (Variable Costs) = $28,710. However, none of the options match this calculation, indicating a possible error in the options provided.

The Following Income Statements Are Provided for Li Company's Last