Question

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

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

Calculation of breakeven sales in dollars

$$\begin{gathered} \mathit{B}\mathit{r}\mathit{e}\mathit{a}\mathit{k}\mathit{e}\mathit{v}\mathit{e}\mathit{n}\mathbf{}\mathit{s}\mathit{a}\mathit{l}\mathit{e}\mathit{s}\mathbf{}\mathit{i}\mathit{n}\mathbf{}\mathit{d}\mathit{o}\mathit{l}\mathit{l}\mathit{a}\mathit{r}\mathit{s}\mathbf{=}\frac{\mathbf{f}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{}\mathbf{t}}{\mathbf{C}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{r}\mathbf{i}\mathbf{b}\mathbf{u}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{}\mathbf{m}\mathbf{a}\mathbf{r}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{640}\mathbf{,}\mathbf{220}}{\mathbf{85}\mathbf{\%}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{753}\mathbf{,}\mathbf{200} \end{gathered}$$

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

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.