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The budgets of four companies yield the following information:

Company

Beach Lake Mountain Valley

Net Sales Revenue \( 1,615,000 \)(d) \( 1,050,000 \)(j)

Variable Costs (a) 60,000 525,000 100,800

Fixed Costs (b) 232,000 260,000 (k)

Operating Income (Loss) 285,600 (e) (g) 31,500

Units Sold 170,000 10,000 (h) (l)

Contribution Margin per Unit \( 3.80 \) (f) \( 75.00 \) 9.00

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?

Short Answer

Expert verified

(1)(a) $969,000

(b) 360,000

(c) 40%

(d) $300,000

(e) $8,000

(f) $24

(g) $265,000

(h) 7,000

(i) 50%

(j) $144,000

(k) $11,700

(l) 4,800

(2) The lowest breakeven point in sales dollars equals $39,000.

(3) Lower contribution margin ratio and lower fixed costs

Step by step solution

01

Calculation of (a), (b), (c)

Net sales revenue

$1,615,000

Variable costs ($1,615,000 / 170,000)-$3.80 ) x 170,000

(a)$969,000

Fixed costs ($1,615,000-$969,000 -$285,600)

(b)$360,400

Operating income (Loss)

$285,600

Units sold

170,000

Contribution margin per unit

$3.80

Contribution margin ratio (($3.80 x 170,000) / $1,615,000)

(c)40%

02

Calculation of (d), (e), (f)

Net sales revenue ($60,000 / (1-80%)

(d) $300,000

Variable costs

$60,000

Fixed costs

$232,000

Operating income (Loss) ($300,000-$60,000-$232,000)

(e) $8,000

Units sold

10,000

Contribution margin per unit ($300,000-$60,000)/10,000

(f)$24

Contribution margin ratio

80%

03

Calculation of (g), (h), (i)

Net sales revenue

$1,050,000

Variable costs

$525,000

Fixed costs

$260,000

Operating income (Loss) ($1,050,000-$525,000-$260,000)

(g) $265,000

Units sold ($1,050,000-$525,000) / $75

(h) 7,000

Contribution margin per unit

$75

Contribution margin ratio ($1,050,000-$525,000)/$1,050,000)

(i)50%

04

Calculation of (j), (k), (l) 

Net sales revenue ($100,800 / (1-30%))

(j)$144,000

Variable costs

$100,800

Fixed costs ($144,000-$100,800-$31,500)

(k)$11,700

Operating income (Loss)

$31,500

Units sold ($144,000 - $100,800)/$9)

(l)4,800

Contribution margin per unit

$9

Contribution margin ratio ($144,000-$100,800)/$144,000)

30%

Step 4: Calculation of breakeven sales in dollars

Breakevensales(Beach)=FixedcostsContributionmarginratio=$360,40040%=$901,000

Breakevensales(Lake)=FixedcostsContributionmarginratio=$232,00080%=$290,000

Breakevensales(Mountain)=FixedcostsContributionmarginratio=$260,00050%=$520,000

Breakevensales(Valley)=FixedcostsContributionmarginratio=$11,70030%=$39,000

Valley has the lowest breakeven point that is $39,000.

Step 4: Reason for low breakeven point

Low contribution margin causes the low breakeven point. Valley has the lowest contribution margin ratio that is why it has the lowest breakeven point.

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Most popular questions from this chapter

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Calculate the breakeven point in units under each independent scenario.

14. Variable costs increase by \)10 per unit.

15. Fixed costs decrease by $600.

16. Sales price increases by 10%.

On the CVP graph, where is the breakeven point shown? Why?

On the CVP graph, where is the breakeven point shown? Why?

What is contribution margin?

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.)

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