Kagaya Tea Warehouse sells Japanese tableware items. They have limited shelf space and can only sell one of these items.

Ramen bowls Tea sets
Budgeted sales (units) 500 200
Sales price per unit $10 $40
Purchase cost per unit $2 $20
Variable packaging cost per unit $1 $10
Fixed overhead $400 $400

Calculate the contribution margin for the ramen bowls

Question

Kagaya Tea Warehouse sells Japanese tableware items. They have limited shelf space and can only sell one of these items.

Ramen bowls	Tea sets
Budgeted sales (units)	500	200
Sales price per unit	$10	$40
Purchase cost per unit	$2	$20
Variable packaging cost per unit	$1	$10
Fixed overhead	$400	$400

Calculate the contribution margin for the ramen bowls

BlackTom AI · Accepted Answer

1. Relevant knowledge points and concepts
Contribution margin (CM) measures how much sales revenue remains after covering variable costs; it contributes toward covering fixed costs and profit. CM per unit = Sales price per unit − Variable cost per unit. Total CM = CM per unit × Number of units sold. Fixed overhead is not a variable cost and is excluded when calculating contribution margin.

2. Step-by-step reasoning
Identify which costs are variable for the ramen bowls: purchase cost and variable packaging cost are variable and change with units sold. Fixed overhead is fixed and therefore not part of the contribution margin calculation. Compute per-unit variable cost, then per-unit contribution, then multiply by budgeted units.

3. Calculations (all intermediate steps)
- Sales price per ramen bowl = $10.00
- Variable costs per ramen bowl:
  - Purchase cost = $2.00
  - Variable packaging cost = $1.00
  - Total variable cost per unit = $2.00 + $1.00 = $3.00
- Contribution margin per unit = Sales price − Variable cost = $10.00 − $3.00 = $7.00
- Budgeted sales (units) = 500
- Total contribution margin = Contribution per unit × Units = $7.00 × 500 = $3,500

4. Why the correct answer is correct
The calculation follows the definition of contribution margin: only variable costs are subtracted from sales. Fixed overhead ($400) is not subtracted when computing contribution margin; it is covered by the total contribution margin and then affects net profit.

5. Why other answers (or common mistakes) would be incorrect
No other answer choices are provided here. Common mistakes would be:
- Subtracting fixed overhead when calculating CM (would produce $3,100 if one incorrectly did $3,500 − $400 = $3,100), which is wrong because fixed costs are excluded from CM.
- Forgetting to include one of the variable costs (e.g., ignoring packaging) would give an inflated CM ($8 × 500 = $4,000) and be incorrect.

6. Conclusion and final answer
The total contribution margin for the ramen bowls is $3,500, which matches the provided answer (3500).

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