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What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

Short Answer

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Answer

There is an inverse relationship between variable cost and contribution margin.

Step by step solution

01

What effect does an increase in sales price have on contribution margin?

If sales price increase the contribution margin will also increase, that means there is a direct relationship between sales price and contribution margin.

02

What effect does an increase in fixed costs have on contribution margin?

Increase in fixed cost does not impact contribution margin in any manner because contribution is the difference of sales price and variable cost.

03

What effect does an increase in variable costs have on contribution margin?

There is an inverse relationship between variable cost and contribution margin. If variable costs increase contribution margin will decrease.

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Most popular questions from this chapter

Mi Tierra Driving School charges \(680 per student to prepare and administer written and driving tests. Variable costs of \)408 per student include trainersโ€™ wages, study materials, and gasoline. Annual fixed costs of \(63,920 include the training facility and fleet of cars.

Requirements

1. For each of the following independent situations, calculate the contribution margin per unit and the breakeven point in units by first referring to the original data provided:

a. Breakeven point with no change in information.

b. Decrease sales price to \)544 per student.

c. Decrease variable costs to \(340 per student.

d. Decrease fixed costs to \)53,040.

2. Compare the impact of changes in the sales price, variable costs, and fixed costs on the contribution margin per unit and the breakeven point in units.

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 Delectableโ€™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 Delectableโ€™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.)

What are the CVP assumptions?

Owner Shan Mu is considering franchising her Noodles by Murestaurant concept. She believes people will pay \(10.00 for a large bowl ofnoodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costsfor a franchise at \(9,000.

Requirements

1. Use the contribution margin ratio approach to find a franchiseโ€™s breakevensales in dollars.

2. Mu believes most locations could generate \)61,500 in monthly sales. Isfranchising a good idea for Mu if franchisees want a minimum monthlyoperating income of $21,000? Explain your answer.

Use the following information to complete Short Exercises S20-16 and S20-17.

Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018:

Individual Family Sales price per ticket \( 50 \) 150 Variable cost per ticket 35 140

Wild Waters expects to sell one individual ticket for every four family tickets. Wild Watersโ€™s total fixed costs are $27,500.

S20-17 Calculating breakeven point for two products

For 2019, Wild Waters expects a sales mix of four individual tickets for every one family ticket.

Requirements

1. Compute the new weighted-average contribution margin per ticket.

2. Calculate the total number of tickets Wild Waters must sell to break even.

3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.

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