Question

Refer to the information about Ramort Company in QS 19-5. If Ramort doubles its production to 40,000 units while sales remain at the current 20,000-unit level, by how much would the company’s contribution margin increase or decrease under variable costing?

Short answer

The contribution margin of the company will decrease by $660,000.

Step-by-step solution

Meaning of Contribution Margin

Contribution margin refers to the amount left with a business organization after recovering all the variable costs from its sales revenue. The contribution margin is computed by deducting variable expenses from revenues.

Determination of increase or decrease in contribution margin

Particulars	Amounts ($)
Sales (20000*60)	$1,200,000
Less: Variable costs:
Direct material (40000*10)	400,000
Direct labor (40000*12)	480,000
Variable overhead (40000*3)	120,000
Variable selling and administration cost (40000*2)	80,000
Contribution margin	$120,000

$\begin{array}{rcl}\mathbf{\text{Decreaseincontributionmargin}}& \mathbf{=}& \mathbf{\text{Contributionmarginat20,000units}}\mathbf{-}\mathbf{\text{Contributionmarginat40,000units}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{780}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{660}\mathbf{,}\mathbf{000}\end{array}$