Chapter 20: Q2021RQ (page 1120)
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
Answer
There is an inverse relationship between variable cost and contribution margin.
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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.)
The budgets of four companies yield the following information:
Company
Blue Red Green Yellow
Net Sales Revenue \( 1,900,000 \) (d) \( 1,500,000 \) (j) Variable Costs (a) 47,250 1,050,000 256,200 Fixed Costs (b) 168,000 159,000 (k) Operating Income (Loss) 298,500 (e) (g) 97,800
Units Sold 190,000 9,000 (h) (l) Contribution Margin per Unit \( 3.00 \) (f) \( 75.00 \) 18.00
Contribution Margin Ratio (c) 80% (i) 30%
Requirements
1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.)
2. Which company has the lowest breakeven point in sales dollars?
3. What causes the low breakeven point?
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?
Calculating breakeven point for two products, margin of safety, andoperating leverage
The contribution margin income statement of Delectable Donuts for May 2018follows:
DELECTABLE DONUTS Contribution Margin Income Statement Month Ended May 31, 2018 |
Net Sales Revenue | \(125,000 | |
Variable cost | ||
Cost of goods sold | \)32,100 | |
Selling cost | 17,400 | |
Administrative cost | 500 | \(50,000 |
Contribution Margin | \)75,000 | |
Fixed cost | ||
Selling cost | \(37,800 | |
Administrative cost | 12,600 | \)50,400 |
Operating income | \(24,600 |
Delectable sells five dozen plain donuts for every dozen custard-filled donuts. A dozenplain donuts sells for \)4.00, with a variable cost of \(1.60 per dozen. A dozen custardfilled donuts sells for \)8.00, with a variable cost of $3.20 per dozen.
Requirements
1. Calculate the weighted-average contribution margin.
2. Determine Delectable’s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution nmargin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.
3. Compute Delectable’s margin of safety in dollars for May 2018.
4. Compute the degree of operating leverage for Delectable Donuts. Estimate thenew operating income if total sales increase by 20%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar.Assume the sales mix remains unchanged.)
5. Prove your answer to Requirement 4 by preparing a contribution marginincome statement with a 20% increase in total sales. (The sales mix remainsunchanged.)
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 \(170,800 per month.
Refer to the original information (ignoring the changes considered in Short Exercise S20-12). Suppose Funday Park increases fixed costs from \)170,800 per month to $231,000 per month. Compute the new breakeven point in tickets and in sales dollars.
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