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The contribution margin income statement of Sugar Lips Donuts for August 2018 follows:

Sugar Lips sells three dozen plain donuts for every dozen custard-filled donuts. A dozen plain donuts sells for \(4.00, with total variable cost of \)1.80 per dozen. A dozen custard-filled donuts sells for \(8.00, with total variable cost of \)3.60 per dozen.

Requirements

1. Calculate the weighted-average contribution margin.

2. Determine Sugar Lips’s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.

3. Compute Sugar Lips’s margin of safety in dollars for August 2018.

4. Compute the degree of operating leverage for Sugar Lips Donuts. Estimate the new operating income if total sales increase by 30%. (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 margin income statement with a 30% increase in total sales. (The sales mix remains unchanged.)

Short Answer

Expert verified
  1. Weighted average contribution equals $2.75.
  2. Breakeven for plain donuts equals 9,000 units and custard filled donuts equals 3,000 units.
  3. Margin of safety equals $65,000
  4. Degree of operating leverage equals1.9231, and revised operating income equals $56,374.
  5. Revised operating income equals $56,375

Step by step solution

01

(1) Computation of weighted average contribution margin

Plain donuts

Custard filled donuts

Total

Selling price

$4

$8

Variable cost

$1.80

$3.60

Contribution per unit

$2.2

$4.4

Sales mix

X 3

X 1

4

Total contribution

$6.6

$4.4

$11

Weighted average contribution margin

$2.75

02

(2) Computation of breakeven point

Breakevensalesofplaindonuts=12,000×34=9,000Breakevensalesofcustardfilleddonuts=12,000×14=3,000

Composite breakeven=FixedcostWeightedaveragecontributionmargin=$33,000$2.75=12,000

Contribution margin income statement

Net sales revenue (9,000 x $4)+($3,000x$8)

$60,000

Variable cost (9,000 x $1.80)+($3,000x$8)

$27,000

Contribution Margin

$33,000

Fixed cost

$33,000

Operating income

$0

03

(3) Calculation of margin of safety 

Marginofsafety=Expectedsales-breakevensales=$125,000-$60,000=$65,000

Marginofsafety=Expectedsales-breakevensales=$125,000-$60,000=$65,000

04

Calculation of operating leverage

Degreeofoperatingleverage=ContributionmarginOperatingincome=$68,750$35,750=1.9231

Revised operating income=Operating income×1+Increase in operating income=$35,750×1+57.69%=$56,374

05

Statement showing contribution margin income statement with a 30% increase in total sales 

Net sales revenue (125,000 x (1+30%)

$162,500

Variable cost ($56,250 x (1+30%)

$73,125

Contribution margin

$89,375

Fixed costs

$33,000

Operating income

$56,375

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Most popular questions from this chapter

Calculating contribution margin ratio, preparing contribution margin income statements For its top managers, Worldwide Travel formats its income statement as follows:

Worldwide’s relevant range is between sales of \(253,000 and \)368,000. Requirements

1. Calculate the contribution margin ratio.

2. Prepare two contribution margin income statements: one at the \(253,000 sales level and one at the \)368,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

Diversified Investor Group is opening an office in Boise, Idaho. Fixed monthly costs are office rent (\(8,000), depreciation on office furniture (\)1,700), utilities (\(2,400), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)11,900). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements

  1. Use the contribution margin ratio approach to compute Diversified’s breakeven revenue in dollars. If the average trade leads to \(800 in revenue for Diversified, how many trades must be made to break even?
  2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)11,200.
  3. Graph Diversified’s CVP relationships. Assume that an average trade leads to \(800 in revenue for Diversified. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)11,200 is earned.
  4. Suppose that the average revenue Diversified earns increases to $2,000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

Question: Determining total variable cost

For each variable cost per unit listed below, determine the total variable cost when units produced and sold are 25, 50, and 100 units.

Direct materials $ 40

Direct labor 80

Variable overhead 9

Sales commission 12

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.

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.)

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