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Chapter 20: Q2021RQ (page 1120)
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
Answer
There is an inverse relationship between variable cost and contribution margin.
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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.)
What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.
On the CVP graph, where is the breakeven point shown? Why?
Question: Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the maître d’. The restaurant would serve dinner Tuesday through Saturday. Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning on using each table twice each evening, and the restaurant will be open 50 weeks per year. The Homs have drawn up the following estimates:
Average revenue, including beverages and desserts \( 45 per meal Average cost of food 15 per meal Chef’s and dishwasher’s salaries 5,100 per month Rent (premises, equipment) 4,000 per month Cleaning (linen, premises) 800 per month Replacement of dishes, cutlery, glasses 300 per month Utilities, advertising, telephone 2,300 per month
Requirements
1. Compute the annual breakeven number of meals and sales revenue for the restaurant.
2. Compute the number of meals and the amount of sales revenue needed to earn operating income of \)75,600 for the year.
3. How many meals must the Homs serve each night to earn their target profit of $75,600?
4. What factors should the Homs consider before they make their decision as to whether to open the restaurant?
Question: 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.
Compute Funday Park’s contribution margin ratio. Carry your computation to two decimal places. Use the contribution margin ratio approach to determine the sales revenue Funday Park needs to break even
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