Gasson Company is a merchandising firm. Next month, the company expects to sell 800 units. The following data describe the company's revenue and cost structure:

Selling price per unit $40
Sales commission 5%
Purchase price (cost) per unit $18
Advertising expense $4,000 per month
Administrative expense $4,500 per month plus 15% of sales

Assume that all activity mentioned in this problem is within the relevant range.

What is the expected contribution margin next month?

Question

Gasson Company is a merchandising firm. Next month, the company expects to sell 800 units. The following data describe the company's revenue and cost structure:

Selling price per unit	$40
Sales commission	5%
Purchase price (cost) per unit	$18
Advertising expense	$4,000 per month
Administrative expense	$4,500 per month plus 15% of sales

Assume that all activity mentioned in this problem is within the relevant range.

What is the expected contribution margin next month?

BlackTom AI · Accepted Answer

Contribution margin per unit equals selling price minus all variable costs per unit.

Relevant concepts:
- Variable costs change with sales volume (commission, purchase cost, and any percentage-based admin).
- Fixed costs do not change with volume (advertising expense and fixed portion of administrative expense).
- Total contribution margin = (selling price − variable cost per unit) × units sold, or = total sales − total variable costs.

Step-by-step calculations:
1. Sales revenue per unit = $40. For 800 units, total sales = 800 × $40 = $32,000.
2. Identify variable costs per unit:
   - Sales commission = 5% of $40 = 0.05 × $40 = $2.00 per unit.
   - Purchase (cost) per unit = $18.00 per unit.
   - Administrative expense that is variable = 15% of sales = 0.15 × $40 = $6.00 per unit.
   Total variable cost per unit = $2.00 + $18.00 + $6.00 = $26.00.
3. Contribution margin per unit = $40.00 − $26.00 = $14.00.
4. Total contribution margin = $14.00 × 800 units = $11,200.
   Alternatively, total variable costs = $26 × 800 = $20,800; total sales $32,000 − $20,800 = $11,200.

Why this is correct:
The contribution margin excludes fixed expenses (advertising $4,000 and fixed admin $4,500), so only the variable portion of admin (15% of sales) and commission and purchase cost are subtracted from sales. Using those variable costs yields $14 contribution per unit and $11,200 total for 800 units.

Why the other options are incorrect:
- $16,000 implies a $20 per-unit contribution margin (ignores some variable costs).
- $17,600 implies a $22 per-unit contribution margin (omits more variable components).
- $14,400 implies an $18 per-unit contribution margin (still understates variable costs).
Each of these overstates contribution margin by failing to include one or more variable costs (commission, purchase cost, or variable admin).

Conclusion: The expected contribution margin next month is $11,200, which matches the provided answer.

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