Computing the unit contribution margin and the contribution margin ratio.
Armstrong Helmet Company manufactures a unique model of bicycle helmet. The company began operations December 1, 2006. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is:
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Cost items and account balances
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Administrative salaries
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$15,500
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Advertising for helmets
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11,000
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Cash, December 1
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0
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Depreciation on factory building
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1,500
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Depreciation on office equipment
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800
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Insurance on factory building
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1,500
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Miscellaneous expense - factory
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1,000
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Office supplies expense
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300
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Professional fees
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500
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Property taxes on factory building
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400
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Raw materials used
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70,000
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Rent on production equipment
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6,000
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Research and development
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10,000
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Sales commissions
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40,000
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Utility costs - factory
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900
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Wages - factory
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0
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Work in progress, December 1
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0
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Work in progress, December 31
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0
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Raw materials inventory, December 31
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0
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Raw materials purchases
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70,000
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Finished goods inventory, December 1
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0
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Production and sales data
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Number of helmets produced
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10,000
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Expected sales in units for December ($40 unit sales price)
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8,000
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Expected sales in units for January
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10,000
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Desired ending inventory
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20% of next month\\\'s sales
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Direct materials per finished unit
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1 kilogram
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Direct materials cost
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$7 per kilogram
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Direct labor hours per unit
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0.35
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Direct labor hourly rate
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$20
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Cash flow data
Cash collections from customers: 75% in month of sale & 25% the following month.
Cash payments to suppliers: 75% in month of purchase & 25% the following month.
Income tax rate: 45%.
Cost of proposed production equipment: $720,000.
Manufacturing overhead and selling & admin costs are paid as incurred.
Desired ending cash balance: $30,000.
Using the data presented above, do the following:
Compute the unit contribution margin and the contribution margin ratio.