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Chapter 20: Q21RQ (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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The Circle Clock Company sells a particular clock for \(25. The variable costs are \)13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating income? Explain your answer.
Preparing a contribution margin income statement
Gabelman Company sells a product for \(95 per unit. Variable costs are \)40 per unit, and fixed costs are $2,200 per month. The company expects to sell 570 units in September. Prepare an income statement for September using the contribution margin format
Use the following information to complete Short Exercises S20-16 and S20-17.
Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018:
Individual Family Sales price per ticket \( 50 \) 150 Variable cost per ticket 35 140
Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters’s total fixed costs are $27,500.
S20-16 Calculating breakeven point for two products
Using the Wild Waters Swim Park information presented, do the following tasks.
Requirements
1. Compute the weighted-average contribution margin per ticket.
2. Calculate the total number of tickets Wild Waters must sell to break even.
3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.
What is target profit?
A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Expected sales are 200 tables per month.
17. Calculate the margin of safety in units.
18. Determine the degree of operating leverage. Use expected sales.
19. The company begins manufacturing wood chairs to match the tables. Chairs sell for \)50 each and have variable costs of \(30. The new production process increases fixed costs to \)7,000 per month. The expected sales mix is one table for every four chairs. Calculate the breakeven point in units for each product.
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