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Calculating breakeven sales and sales to earn a target profit;preparing a contribution margin income statement

Famous Productions performs London shows. The average show sells 1,000 ticketsat \(60 per ticket. There are 175 shows a year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of60, each earning a net average of \)320 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)459,200.

Requirements

1. Compute revenue and variable costs for each show.

2. Use the equation approach to compute the number of shows Famous Productionsmust perform each year to break even.

3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $4,264,000. Is this profit goal realistic? Giveyour reasoning.

4. Prepare Famous Productions’s contribution margin income statement for 175shows performed in 2018. Report only two categories of costs: variable andfixed.

Short Answer

Expert verified
  1. Revenue for each show is $60,000; and total variable cost is $27,200.
  2. In break even point, no of shows will be 144 shows.
  3. Yes, the profit goal is realistic as the acutal no of shows i.e., 175 shows is more than the shows required for the profit of $4,264,000i.e., 144 shows.
  4. The contribution margin Income Statement shows the net operating profit of $5,280,800

Step by step solution

01

Step 1:1. Computation of revenue for each show-

Salesrevenuepershow=Tickets×Sellingpriceperticket=1,000×$60=$60,000

02

1. Computation of variable cost for each show-

Variablecostofperformance=Cast×Netaveragepershow=$60×320=$19,200

Variablecostofticketprinting=Tickets×Programprintingcostperguest=1,000×$8=$8000

Totalvariablecost=VariableCostofPerformance+VariableCostofPrinting=$19,200+$8,000=$27,200

03

Step 3:2.Computation of number of show in Break even point-

Let number of show be ‘x’

Targetprofit=Revenue-Variablecost-Fixedcost$0=($60,000×x)-($27,200×x)-$459,200$32,800×x=$459,200x=14

04

Step 4:3 Computation of contribution margin ratio-

Contributionmarginratio=Sales-RevenueSales=$60,000-$27,200$60,000=$32,800$60,000=54.67%

05

3. Computation of Break even point-

BreakevenSales=Fixedcost+TargetprofitContributionmarginratio=$459,200+$4,264,00054.67%=$8,639,473

Breakevenpoint(inshow)=BreakevenpointRevenuepershow=$8,639,473$60,000=144shows

06

Step 6:4.Contribution margin income statement-

Contribution margin Income Statement

For the year ended 2016

Revenue

$10,500,000

Less: Variable cost

($4,760,000)

Contribution

$5,740,000

Less: Fixed Costs

($459,200)

Net Operating Profit

$5,280,800

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Most popular questions from this chapter

Preparing a contribution margin income statement

Gabelman Company sells a product for \(95 per unit. Variable costs are \)40 per unit, and fixed costs are $2,200 per month. The company expects to sell 570 units in September. Prepare an income statement for September using the contribution margin format

What is target profit?

Question: Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month.

Using the Funday Park information presented, do the following tasks.

Requirements

1. Suppose Funday Park cuts its ticket price from \)70 to \(56 to increase the number of tickets sold. Compute the new breakeven point in tickets and in sales dollars.

2. Ignore the information in Requirement 1. Instead, assume that Funday Park increases the variable cost from \)42 to $56 per ticket. Compute the new breakeven point in tickets and in sales dollars.

Question: Of the three approaches to calculate sales required to achieve the breakeven point, which one(s) calculate the required sales in units and which one(s) calculate the required sales in dollars?

Scotty’s Scooters plans to sell a standard scooter for \(55 and a chrome scooter for \)70. Scotty’s purchases the standard scooter for \(30 and the chrome scooter for \)40. Scotty’s expects to sell one standard scooter for every three chrome scooters. Scotty’s monthly fixed costs are \(23,000.

Requirements

1. How many of each type of scooter must Scotty’s Scooters sell each month to break even?

2. How many of each type of scooter must Scotty’s Scooters sell each month to earn \)25,300?

3. Suppose Scotty’s expectation to sell one standard scooter for every three chrome scooters was incorrect and for every four scooters sold two are standard scooters and two are chrome scooters. Will the breakeven point of total scooters increase or decrease? Why? (Calculation not required.)

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