The question asks for the manufacturing contribution margin calculated on the variable costing basis. This answer is incorrect because it includes the variable costs of selling and administration in the calculation of manufacturing contribution when only variable manufacturing costs should be included. We do include variable selling and administrative costs when calculating the contribution margin. But adding the word "manufacturing" in front of the words "contribution margin" limits the expenses subtracted in calculating this contribution margin to only the manufacturing costs of the units sold.
This is total revenue minus total variable manufacturing costs and total fixed manufacturing overhead. The manufacturing contribution margin is decreased by variable manufacturing costs only, not by fixed manufacturing overhead.
This problem does not specify whether Valyn is using a standard cost system (in which standard, or planned, costs are used to account for production) or an actual cost system (in which actual costs are used). However, it does say that Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product. And since the actual, incurred per unit costs for direct materials, direct labor and variable manufacturing overhead are exactly the same as the planned per unit costs for those items, we do not need to know whether standard costing or actual costing is being used in order to answer this question. The per unit sales price was $70 and the per unit variable production costs were $25 (direct materials $12, direct labor $9 and variable manufacturing overhead $4). The contribution margin per unit was therefore $70 ? $25, or $45; and with 125,000 units sold, this gives a total manufacturing contribution margin under the variable costing basis of $5,625,000.
This is incorrect for two reasons: (1) It is calculated using a manufacturing contribution margin per unit of $40, which includes a deduction for $5 of fixed manufacturing overhead per unit. Fixed manufacturing overhead is not a deduction made in calculating the contribution margin. Only variable manufacturing costs for the units sold are deducted. Furthermore, when variable costing is used, all fixed costs, including manufacturing costs, are expensed as they are incurred. (2) It also includes a deduction for $65,000 in under-applied fixed manufacturing overhead. Since under variable costing, all fixed costs, including manufacturing costs, are expensed as they are incurred, there can be no under-applied fixed manufacturing overhead.
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The planned per unit cost figures shown in the above schedule were based on Valyn producing and selling 140,000 units. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting year. The beginning finished goods inventory for absorption costing purposes was valued at the previous year's planned unit manufacturing cost, which was the same as the current year's planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price for the current year was $70.00 per unit. Valyn Corporation's actual manufacturing contribution margin calculated on the variable costing basis wass