Question

The Stark Company manufactures a product that is expected to incur \(20 per unit in variable production costs and sell for \)40 per unit. The sales commission is 10% of the sales price. Due to intense competition, Stark actually sold 200 units for \(38 per unit. The actual variable production costs incurred were \)23.75 per unit. Calculate the total contribution margin and contribution margin ratio at the expected price/costs and the actual price/costs. How might management use this information?

Short answer

The contribution margin and contribution margin ratioare $3,200 and 40% for estimated and $2,090 and 27.5% for actual respectively.

Management can use this information to lower their variable cost, due to which contribution margin is lower. Management should focus on minimizing the variable cost to expectations to increase the contribution margin. Due to intense competition in the market sale price increment will affect the sales of the company but the cost is in the hands of the company. It can minimize it for better results in the upcoming future.

Step-by-step solution

Profitability analysis based on contribution margin

Particulars	(Expected) Amount	(Actual) Amount
Net sales revenue	$8,000	$7,600
Less: Variable cost	$4,000	$4,750
Less: Sales commission @ 10% of Sales	$800	$760
Contribution Margin	$3,200	$2,090

Profitability analysis based on contribution margin ratio

Particulars	(Expected) Amount	(Actual) Amount
Net sales revenue	$8,000	$7,600
Less: Variable cost	$4,000	$4,750
Less: Sales commission	$800	$760
Contribution Margin	$3,200	$2,090
Contribution margin ratio (Contribution margin/net sales revenue)	40%	27.5%