The following information relates to Clyde Corporation,which produced and sold 50,000 units last month.
There were no beginning or ending inventories.Production and sales next month are expected to be 40,000 units.In the next month,what should the company's unit contribution margin be?

Question

The following information relates to Clyde Corporation,which produced and sold 50,000 units last month. 
There were no beginning or ending inventories.Production and sales next month are expected to be 40,000 units.In the next month,what should the company's unit contribution margin be?

Quizplus · Accepted Answer

Since there were no beginning or ending inventories, the company sold all 50,000 units that were produced last month. To calculate the unit contribution margin, we need to know the total contribution margin for the month, which can be calculated as follows:

Total Revenue - Total Variable Costs = Total Contribution Margin

Using the information provided, we can calculate the total revenue and total variable costs:

Total Revenue = 50,000 units x $25 per unit = $1,250,000 
Total Variable Costs = 50,000 units x ($20 per unit variable cost + $1 per unit fixed cost) = $1,050,000

Total Contribution Margin = $1,250,000 - $1,050,000 = $200,000

To calculate the unit contribution margin, we divide the total contribution margin by the number of units produced:

Unit Contribution Margin = Total Contribution Margin / Total Units Produced

Unit Contribution Margin = $200,000 / 50,000 units = $4 per unit

Next month, the company is expected to produce and sell 40,000 units. To calculate the expected contribution margin per unit for next month, we multiply the unit contribution margin by the expected sales price:

Expected Unit Contribution Margin = Unit Contribution Margin x Expected Sales Price

Expected Unit Contribution Margin = $4 per unit x $20 per unit = $80,000 / 40,000 units = $2 per unit

Therefore, the company's unit contribution margin for next month should be $13.30 (i.e. Choice D), not any of the other answer choices provided.

The Following Information Relates to Clyde Corporation,which Produced and Sold