Concept explainers
(a)
Contribution Margin:
The margin of profit which is computed after considering the variable cost only and not the fixed costis known as contribution. In other words, it means the contribution made by selling the product after covering its variable cost to the company.
The contribution margin ratio.
Answer to Problem 21E
The contribution margin ratio is
Explanation of Solution
Contribution Margin Income Statement:
Particulars | Amount |
Revenue | |
Total variable cost |
|
Total Contribution Margin |
(b)
Concept introduction:
Breakeven Point:
The level of sales where the company is neither on profit nor loss is termed as breakeven point. In other words, that level of sales at which the fixed cost of the business is recovered.
To compute:
The breakeven point if the fixed cost is
Answer to Problem 21E
The breakeven point is
Explanation of Solution
Particulars | Amount |
Revenue | |
Total variable cost |
|
Total Contribution Margin |
The contribution margin ratio is
The break-even point in units is calculated as:
(c)
Concept introduction:
Target Profit:
The target profit is that profit which a company decides to achieve and this analysis helps in determinig the level of sales by which this target can be achieved.
The total sales to achieve target profit of
Answer to Problem 21E
The target sale point is
Explanation of Solution
Contribution Margin Income Statement:
Particulars | Amount |
Revenue | |
Total variable cost |
|
Total Contribution Margin |
The contribution margin ratio is
The total sales for achieving the target profit are calculated as:
(d)
Concept introduction:
Target Profit:
The target profit is that profit which a company decides to achieve and this analysis helps in determinig the level of sales by which this target can be achieved.
The sale revenue from each product to achieve target profit of
Answer to Problem 21E
The sale revenue from each product is divided as per their percentage ratio product mix which amounts to
Explanation of Solution
The total sales for achieving the target profit are calculated as:
The share of sales of Thermos A will be
The share of sales of Thermos B will be
The share of sales of Thermos C will be
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Chapter 6 Solutions
Managerial Accounting
- Cost-Volume-Profit, Margin of Safety Victoria Company produces a single product. Last years income statement is as follows: Required: 1. Compute the break-even point in units and sales dollars calculated using the break-even units. 2. What was the margin of safety for Victoria last year in sales dollars? 3. Suppose that Victoria is considering an investment in new technology that will increase fixed cost by 250,000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?arrow_forwardContribution Margin Ratio, Break-Even Sales, Operating Leverage Elgart Company produces plastic mailboxes. The projected income statement for the coming year follows: Required: 1. Compute the contribution margin ratio for the mailboxes. 2. How much revenue must Elgart earn in order to break even? 3. What is the effect on the contribution margin ratio if the unit selling price and unit variable cost each increase by 15%? 4. CONCEPTUAL CONNECTION Suppose that management has decided to give a 4% commission on all sales. The projected income statement does not reflect this commission. Recompute the contribution margin ratio, assuming that the commission will be paid. What effect does this have on the break-even point? 5. CONCEPTUAL CONNECTION If the commission is paid as described in Requirement 4, management expects sales revenues to increase by 80,000. How will this affect operating leverage? Is it a sound decision to implement the commission? Support your answer with appropriate computations.arrow_forwardKlamath Company produces a single product. The projected income statement for the coming year is as follows: Required: 1. Compute the unit contribution margin and the units that must be sold to break even. 2. Suppose 10,000 units are sold above break-even. What is the operating income? 3. Compute the contribution margin ratio. Use the contribution margin ratio to compute the break-even point in sales revenue. (Note: Round the contribution margin ratio to four decimal places, and round the sales revenue to the nearest dollar.) Suppose that revenues are 200,000 more than expected for the coming year. What would the total operating income be?arrow_forward
- Contribution margin, break-even sales, cost-volume-profit chart, margin of safety, and operating leverage Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows: It is expected that 12,000 units will be sold at a price of 240 a unit. Maximum sales within the relevant range are 18,000 units. Instructions 1. Prepare an estimated income statement for 20Y7. 2. What is the expected contribution margin ratio? 3. Determine the break-even sales in units and dollars. 4. Construct a cost-volume-profit chart indicating the break-even sales. 5. What is the expected margin of safety in dollars and as a percentage of sales? (Round to one decimal place.) 6. Determine the operating leverage.arrow_forwardSales Needed to Earn Target Income Chillmax Company plans to sell 3,500 pairs of shoes at 60 each in the coming year. Variable cost is 35% of the sales price; contribution margin is 65% of the sales price. Total fixed cost equals 78,000 (includes fixed factory overhead and fixed selling and administrative expense). Required: 1. Calculate the sales revenue that Chillmax must make to earn operating income of 81,900 by using the point in sales equation. 2. Check your answer by preparing a contribution margin income statement based on the sales dollars calculated in Requirement 1.arrow_forwardSchylar Pharmaceuticals, Inc., plans to sell 130,000 units of antibiotic at an average price of 22 each in the coming year. Total variable costs equal 1,086,800. Total fixed costs equal 8,000,000. (Round all ratios to four significant digits, and round all dollar amounts to the nearest dollar.) Required: 1. What is the contribution margin per unit? What is the contribution margin ratio? 2. Calculate the sales revenue needed to break even. 3. Calculate the sales revenue needed to achieve a target profit of 245,000. 4. What if the average price per unit increased to 23.50? Recalculate: a. Contribution margin per unit b. Contribution margin ratio (rounded to four decimal places) c. Sales revenue needed to break even d. Sales revenue needed to achieve a target profit of 245,000arrow_forward
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