The second document provides monthly sales and contribution margin ratios for two products, Model A100 and Model B900, distributed by Okabee Enterprises. It asks to prepare a contribution format income statement, calculate the break-even point based on the current sales mix, and determine how much net
The second document provides monthly sales and contribution margin ratios for two products, Model A100 and Model B900, distributed by Okabee Enterprises. It asks to prepare a contribution format income statement, calculate the break-even point based on the current sales mix, and determine how much net
The second document provides monthly sales and contribution margin ratios for two products, Model A100 and Model B900, distributed by Okabee Enterprises. It asks to prepare a contribution format income statement, calculate the break-even point based on the current sales mix, and determine how much net
The second document provides monthly sales and contribution margin ratios for two products, Model A100 and Model B900, distributed by Okabee Enterprises. It asks to prepare a contribution format income statement, calculate the break-even point based on the current sales mix, and determine how much net
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EXERCISE 5–11
Pringle Company distributes a single product. The company’s sales and expenses for a recent month follow:
Required: 1. What is the monthly break-even point in units sold and in sales dollars? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3. How many units would have to be sold each month to earn a target profit of $18,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target level of sales. 4. Refer to the original data. Compute the company’s margin of safety in both dollar and percentage terms. 5. What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Solution
1. Break Even Point in Units and Sales Dollars?
𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 (𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔) $𝟏𝟓𝟎,𝟎𝟎𝟎
BEP (U) = = = 12,500 units 𝑼𝒏𝒊𝒕 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 $𝟏𝟐 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕
𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 (𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔) $𝟏𝟓𝟎,𝟎𝟎𝟎
BEP ($) = = = $500,000 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟑𝟎%
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕
Contribution Margin Ratio = × 100 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕
$𝟏𝟐 Contribution Margin Ratio = × 100 = 30% $𝟒𝟎
2. Without resorting to computations, what is the total contribution margin at the break- even point? The contribution margin at the break-even point is $150,000 because at that point it must equal the fixed expenses. 3. How many units would have to be sold each month to earn a target profit of $18,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target level of sales.
𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 + 𝑻𝒂𝒓𝒈𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
Units Sold to attain target profit = 𝑼𝒏𝒊𝒕 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏
$𝟏𝟓𝟎,𝟎𝟎𝟎 +$𝟏𝟖,𝟎𝟎𝟎 Units Sold to attain target profit = = 14,000 units $𝟏𝟐 𝑷𝒆𝒓 𝑼𝒏𝒊𝒕
Verifying our answer:
Total Unit Sales (14,000 units × $40 per unit) .............. $560,000 $40 (-) Variable expenses (14,000 units × $28) 392,000 28 (=) Contribution margin 168,000 $12 (-) Fixed expenses ...................................... 150,000 (=) Net operating income ............................ $ 18,000
4. Refer to the original data. Compute the company’s margin of safety in both dollar and percentage terms.
Margin of Safety in Dollars = Sales revenue – BEP($)
= $600,000 - $500,000 = $100,000
Margin of Safety in units = Sales units – BEP(U)
= [$600,000÷$40] – 12,500 = 2,500 units
5. What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕
a) Contribution Margin Ratio = × 100 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕
$𝟏𝟐 Contribution Margin Ratio = × 100 = 30% $𝟒𝟎
b) Change in Net Income (Increase) = Change in Sales × Contribution margin ration
Change in Net Income (Increase) = $80,000 × 30% = $24,000 EXERCISE 5–14 Okabee Enterprises is the distributor for two products, Model A100 and Model B900. Monthly sales and the contribution margin ratios for the two products follow:
The company’s fixed expenses total $598,500 per month.
Required: 1. Prepare a contribution format income statement for the company as a whole. 2. Compute the break-even point for the company based on the current sales mix. 3. If sales increase by $50,000 per month, by how much would you expect net operating income to increase? What are your assumptions?
Solution :
1. Prepare a contribution format income statement for the company as a whole.
