Savadyne, Inc. produces flash drives. The selling price is $8 per drive. The var

Question

Savadyne, Inc. produces flash drives. The selling price is $8 per drive. The variable cost of production is $2.40 per unit and the fixed cost per month is $3,600.

(a) Calculate the contribution margin associated with each flash drive.
(b) In August, the company sold 200 more flash drives than planned. What is the expected effect on profit of selling the additional drives?
(c) Calculate the contribution margin ratio associated with one flash drive.
(d) In October, the company had sales that were $2,400 higher than planned. What is the expected effect on profit related to the additional sales?

Explanation / Answer

1)    Savadyne, Inc. produces flash drives. The selling price is $8 per drive. The variable cost of production is $2.40 per unit and the fixed cost per month is $3,600.

a)Calculate the contribution margin associated with each flash drive.

$8 sales price - $2.40 variable cost = $5.60 contribution margin per drive

b) In August, the company sold 200 more flash drives than planned. What is the expected effect on profit of selling the additional drives?

200 x $5.60 contribution margin = $1120 increase to profits

c)Calculate the contribution margin ratio associated with one flash drive.

CM ratio = CM / sales = $5.60 / $8 = 0.70 or 70%

d)In october, the company had sales that were $2,400 higher than planned. What is the expected effect on profit related to the additional sales?

$2400 x 70% CM ratio = $1680 increase to profit on additional sales

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