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)Explain the benefits and advantages to the company for each scenario.

)Explain the benefits and advantages to the company for each scenario.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Lorenzo, the owner of a local poster shop, comes to you for help. While his shop has been breaking even for the past two years, it has not been able to generate a profit. For him to keep the shop open, he needs to earn at least $12,000 in operating income next year.

Review the contribution margin income statements for Lorenzo's shop and find the following:

1)Explain the benefits and advantages to the company for each scenario.

2)Explain the disadvantages to the company for each scenario.

 

Option A Contribution Margin Income Statement CONTRIBUTION MARGIN BASED ON THE PRICE INCREASE OF $9.25 Option B Contribution Margin Income Statement Sales $ 114,496.50 Sales $ 119,954.00 Less Variable Costs: $ 29,707.20 Less Variable Costs: $ 31,123.20 Contribution Margin $ 84,789.30 Contribution Margin $ 88,830.80 Less Fixed Costs 60,120.00 Less Fixed Costs $ 61,120.00 Operating Income $ 24,669.30 Operating Income $ 27,710.80 Income tax (25%) $6,167.33 Income tax (25%) $ 6,927.70 Net Income after tax $ 18,501.98 Net Income after tax $ 20,783.10 New selling price $ 9.25 New Selling Price $ 9.25 New Sales Volume Units 12378.00 New Fixed Costs $ 61,120.00 New Sales Volume Units 12968.00 CONTRIBUTION MARGIN BASED ON PRICE OF $6.75 Option B Option A Contribution Margin Income Statement Contribution Margin Income Statement Sales $ 83,551.50 Sales $ 97,260.00 Less Variable Costs: $ 29,707.20 Less Variable Costs: $ 31,123.20 Contribution Margin $ 53,844.30 Contribution Margin $ 66,136.80 Less Fixed Costs $ 60,120.00 Less Fixed Costs $ 61,120.00 Operating Income $ (6,275.70) Operating Income $ 5,016.80 New Selling Price $ New Sales Volume Units 6.75 12378.00 New Fixed Costs New Sales Volume Units es 61,120.00 12968.00
Transcribed Image Text:Option A Contribution Margin Income Statement CONTRIBUTION MARGIN BASED ON THE PRICE INCREASE OF $9.25 Option B Contribution Margin Income Statement Sales $ 114,496.50 Sales $ 119,954.00 Less Variable Costs: $ 29,707.20 Less Variable Costs: $ 31,123.20 Contribution Margin $ 84,789.30 Contribution Margin $ 88,830.80 Less Fixed Costs 60,120.00 Less Fixed Costs $ 61,120.00 Operating Income $ 24,669.30 Operating Income $ 27,710.80 Income tax (25%) $6,167.33 Income tax (25%) $ 6,927.70 Net Income after tax $ 18,501.98 Net Income after tax $ 20,783.10 New selling price $ 9.25 New Selling Price $ 9.25 New Sales Volume Units 12378.00 New Fixed Costs $ 61,120.00 New Sales Volume Units 12968.00 CONTRIBUTION MARGIN BASED ON PRICE OF $6.75 Option B Option A Contribution Margin Income Statement Contribution Margin Income Statement Sales $ 83,551.50 Sales $ 97,260.00 Less Variable Costs: $ 29,707.20 Less Variable Costs: $ 31,123.20 Contribution Margin $ 53,844.30 Contribution Margin $ 66,136.80 Less Fixed Costs $ 60,120.00 Less Fixed Costs $ 61,120.00 Operating Income $ (6,275.70) Operating Income $ 5,016.80 New Selling Price $ New Sales Volume Units 6.75 12378.00 New Fixed Costs New Sales Volume Units es 61,120.00 12968.00
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