Question

Polarix is a retailer of ATVs (all-terrain vehicles) and accessories. An income statement for its Consumer ATV Department for the current year follows. ATVs sell for \(3,800 each. Variable selling expenses are \)270 per ATV. The remaining selling expenses are fixed. Administrative expenses are 40% variable and 60% fixed. The company does not manufacture its own ATVs; it purchases them from a supplier for \(1,830 each.

POLARIX
Income Statement—Consumer ATV Department
For Year Ended December 31, 2017
Sales		\)646,000
Cost of goods sold		311,100
Gross margin		334,900
Operating expenses
Selling expenses	\(135,000
Administrative expenses	59,500	194,500
Net income		\)140,400

1. Prepare an income statement for this current year using the contribution margin format.

2. For each ATV sold during this year, what is the contribution toward covering fixed expenses and earning income?

Short answer

The contribution marginof the company is$265,200.

Step-by-step solution

 Step 1: Meaning of Contribution 

Contribution refers to the profit left in the hands of a business entity after recovering all its variable costs from the sales revenue. It is computed by taking the difference betweenselling price per unit and variable cost per unit.

Preparation of income statement

Polarix
Income Statement
Particulars	Details	Amounts ($)
Sales		$646,000
Less: Variable costs:
Cost of goods sold		311,100
Selling expenses	(646000/3800)*270	45,900
Administrative expenses	(59500*40%)	23,800
Contribution margin		$265,200
Less: Fixed costs
Administrative expenses	(59500*60%)	35,700
Selling expenses	(135000-45900)	89,100
Net income		$140,400

Computation of per unit contribution margin

$\begin{array}{rcl}\mathbf{Contribution}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit}& \mathbf{=}& \frac{\mathbf{Contribution}\mathbf{}\mathbf{margin}}{\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{units}\mathbf{}\mathbf{sold}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{265}\mathbf{,}\mathbf{200}}{\frac{\mathbf{\$}\mathbf{646}\mathbf{,}\mathbf{000}}{\mathbf{3}\mathbf{,}\mathbf{800}}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{265}\mathbf{,}\mathbf{200}}{\mathbf{170}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{560}\\ & & \end{array}$