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Chapter 20: Q20-9RQ (page 1119)
What is contribution margin?
Answer
When total variable cost is subtracted from sales revenue it results in contribution margin.
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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.)
Use the following information to complete Short Exercises S20-10 through S20-15.
Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.
S20-15 Computing degree of operating leverage
Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the degree of operating leverage (round to two decimal places). Estimate the operating income if sales increase by 15%.
What is the relevant range?
Identifying variable, fixed, and mixed costs
Philadelphia Acoustics builds innovative speakers for music and home theater systems. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of speakers produced and sold.
1. Units of production depreciation on routers used to cut wood enclosures.
2. Wood for speaker enclosures.
3. Patents on crossover relays.
4. Total compensation to salesperson who receives a salary plus a commission based on meeting sales goals.
5. Crossover relays.
6. Straight-line depreciation on manufacturing plant.
7. Grill cloth.
8. Insurance on the corporate office.
9. Glue.
10. Quality inspector’s salary.
Question: Computing contribution margin in total, per unit, and as a ratio
Complete the table below for contribution margin per unit, total contribution margin, and contribution margin ratio:
A B C Number of units 1,720 units 14,920 units 4,620 units
Sales price per unit \( 1,800 \) 4,500 $ 5,550
Variable costs per unit 720 3,600 1,665
Calculate:
Contribution margin per unit
Total contribution margin
Contribution margin ratio
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