Orion Company sells several products. Information of average revenue and costs i

Question

Orion Company sells several products. Information of average revenue and costs is as follows:

            Selling price per unit                           $23

            Variable costs per unit:

                  Direct material                                $4

                  Direct manufacturing labor         $1.70

                  Manufacturing overhead             $0.40

                  Selling costs                                    $2

            Annual fixed costs                       $100,000

The company sells 12,000 units at the end of the year.

If direct labor and direct material costs increase by $1 each, contribution margin ________.

Explanation / Answer

decreases by $24,000

Contribution margin = ($23 ? $5 ? $2.70 ? $0.40 ? $2) × 12,000 = $154,800

Old contribution margin = ($23 ? $4 ? $1.70 ? $0.40 ? $2) × 12,000 = $178,800

The previous contribution margin was $178,800 which means it decreased by $24,000.

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