United Merchants Company sells 4,000 units at $60 per unit. Variable costs are $45 per unit and fixed costs are $40,000. Required:
a. What is the contribution margin ratio?
b. What is the unit contribution margin?
c. What is the income from operation?

a. Contribution margin ratio = 25%

b. Unit contribution margin = $15 per unit

c. Income from operation = $20,000

Explanation:

a. What is the contribution margin ratio?

This can be calculated uisng the following formula:

Contribution margin ratio = (TSR - TVC) / TSR (1)

Where;

TSR = Total sales revenue = Selling price per unit * Unit sold = $60 * 4,000 = $240,000

TVC = Total variable cost = Variable cost per unit * Unit sold = $45 * 4,000 = $180,000

Substituting the values into equation (1), we have:

Contribution margin ratio = ($240,000 - $180,000) / $240,000 = $60,000 / $240,000 = 0.25, 0r 25%

b. What is the unit contribution margin?

This can be calculated as follows:

Unit contribution margin = Selling price per unit - Variable cost per unit = $60 - $45 = $15 per unit

c. What is the income from operation?

This can be calculated as follows:

Income from operation = Total sales revenue - Total variable cost - Fixed costs (2)

Where;

Total sales revenue = Selling price per unit * Unit sold = $60 * 4,000 = $240,000

Total variable cost = Variable cost per unit * Unit sold = $45 * 4,000 = $180,000

Fixed costs = $40,000

Substituting the values into equation (2), we have:

Income from operation = $240,000 - $180,000 - $40,000 = $20,000

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