Chapter 20: Q5RQ (page 1119)
Describe the three steps of the high-low method.
Step 1: Calculation of variable cost per unit
Step 2: Calculation of fixed cost
Step 3: Creation and use of equation
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What is contribution margin?
Computing margin of safety
Robbie’s Repair Shop has a monthly target profit of \(31,000. Variable costs are 20%of sales, and monthly fixed costs are \)19,000.
Requirements
1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.
2. Express Robbie’s margin of safety as a percentage of target sales.
3. Why would Robbie’s management want to know the shop’s margin of safety?
How does a contribution margin income statement differ from a traditional income statement?
Complete the table below for the missing amounts:
A B C
Number of units 2,064 units (d) 2,570 units
Sales price per unit \( 250 \) 125 $ (g)
Variable costs per unit (a) 50 4,528
Contribution margin per unit 125 (e) (h)
Total contribution margin (b) 1,567,500 (i)
Contribution margin ratio (c) (f) 20%
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?
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