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Question: Gilbert’s Steel Parts produces parts for the automobile industry. Thecompany has monthly fixed costs of \(640,220 and a contribution margin of85% of revenues.

Requirements

1. Compute Gilbert’s monthly breakeven sales in dollars. Use the contributionmargin ratio approach.

2. Use contribution margin income statements to compute Gilbert’s monthlyoperating income or operating loss if revenues are \)500,000 and if they are$1,050,000.

3. Do the results in Requirement 2 make sense given the breakeven sales youcomputed in Requirement 1? Explain.

Short Answer

Expert verified

Answer

1. Breakeven sales is $753,200

2. The operating income/(Loss) at $500,000 sales level is ($215,220) and$252,280 at $1,050,000 sales.

3. Yes, it is relatable.

Step by step solution

01

Calculation of breakeven sales in dollars

Breakevensalesindollars=fixedcosttContributionmarginratio=$640,22085%=$753,200

02

Contribution margin income statement


When sales is
When sales is

$500,000
$1,050,000
Sales
$500,000
$1,050,000
(-) Variable cost (15% of sales)
($75,000)
$1,050,000
Contribution Margin (85% of Sales)
$425,000
$892,500
(-) Fixed cost
($640,220)
($640,220)
Operating income/ (Loss)
($215,220)
$252,280
03

Analysis

Yes, the results in requirement 2 does make sense given the breakeven sales of $753,200 in requirement 1 as it indicates sales below breakeven level is not profitable.

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Most popular questions from this chapter

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 Waters’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.

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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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Identify each cost below as variable (V), fixed (F), or mixed (M), relative to units sold. Explain your reason.

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How does a contribution margin income statement differ from a traditional income statement?

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