I.

The difference between a fixed expense and a variable expense is that while fixed expenses
remain constant throughout the production and do not change variable expense change
periodically.
1. Packaging Labour - is a variable expense as it changes with change in production.
2. Electricity Is a variable expense since it is affected by changes in production when it is the
source of energy for production activities.
3. Amortization is a fixed expense since it is not affected by changes in production levels
4. Rent - is not affected by changes in production hence a fixed expense
5. Shipping expense is a variable expense and is affected by changes in production

II. Calculate Contribution Margin (CM)

Contribution margin = Revenue Variable cost (VC)
We can obtain VC as well as Fixed Cost (FC) from our Income statement.
FC = $ 50,000
VC = $ 75,000 hence,
TOTAL COST (TC) = VC + FC
= $ 125,000
This is because labour forms our variable costs in production while material are the fixed costs.
Therefore,
CM = $ 650,000 - $ 75,000
= $ 575,000

III. Calculate the units necessary to produce for a breakeven scenario

Obtain VC and CM per units produced
Units produced = 12,000 nits
VC = (72,000/12000) = 6.25
CM = (575,000/12,000) = 47.92

Breakeven sales units = FC/ (CM/units produced)

= 50,000/47.92
= 1043.4 units

IV. Calculate new contribution margin after reduction of labour to $ 55,000

New CM = $ 650,000 - $ 55,000
= $ 595,000

V. Calculate the Gross Profit Margin and Net Profit Margin Ratios
Gross Profit Margin: Net Profit Margin
= $525,000: $237,000
= 175:19
=2.2:1