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Chapter 20: Q29E (page 1127)

Question: Gilbert’s Steel Parts produces parts for the automobile industry. Thecompany has monthly fixed costs of \(640,220 and a contribution margin of85% of revenues.

Requirements

1. Compute Gilbert’s monthly breakeven sales in dollars. Use the contributionmargin ratio approach.

2. Use contribution margin income statements to compute Gilbert’s monthlyoperating income or operating loss if revenues are \)500,000 and if they are$1,050,000.

3. Do the results in Requirement 2 make sense given the breakeven sales youcomputed in Requirement 1? Explain.

Short Answer

Expert verified

Answer

1. Breakeven sales is $753,200

2. The operating income/(Loss) at $500,000 sales level is ($215,220) and$252,280 at $1,050,000 sales.

3. Yes, it is relatable.

Step by step solution

01

Calculation of breakeven sales in dollars

Breakevensalesindollars=fixedcosttContributionmarginratio=$640,22085%=$753,200

02

Contribution margin income statement


When sales is
When sales is

$500,000
$1,050,000
Sales
$500,000
$1,050,000
(-) Variable cost (15% of sales)
($75,000)
$1,050,000
Contribution Margin (85% of Sales)
$425,000
$892,500
(-) Fixed cost
($640,220)
($640,220)
Operating income/ (Loss)
($215,220)
$252,280
03

Analysis

Yes, the results in requirement 2 does make sense given the breakeven sales of $753,200 in requirement 1 as it indicates sales below breakeven level is not profitable.

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Most popular questions from this chapter

Identifying variable, fixed, and mixed costs Holly’s Day Care has been in operation for several years. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of students enrolled.

1. Building rent.

2. Toys.

3. Compensation of the office manager, who receives a salary plus a bonus based on number of students enrolled.

4. Afternoon snacks.

5. Lawn service contract at $200 per month.

6. Holly’s salary.

7. Wages of afterschool employees.

8. Drawing paper for students’ artwork.

9. Straight-line depreciation on furniture and playground equipment.

10. Fee paid to security company for monthly service.

What is contribution margin?

What is the purpose of using the high-low method?

What is cost stickiness? Why do managers need to be aware of cost stickiness?

White Company sells flags with team logos. White has fixed costs of \(639,600 per year plus variable costs of \)4.20 per flag. Each flag sells for \(12.00.

Requirements

1. Use the equation approach to compute the number of flags White must sell each year to break even.

2. Use the contribution margin ratio approach to compute the dollar sales White needs to earn \)32,500 in operating income for 2018. (Round the contribution margin to two decimal places.)

3. Prepare White’s contribution margin income statement for the year ended December 31, 2018, for sales of 73,000 flags. (Round your final answers up to the next whole number.)

4. The company is considering an expansion that will increase fixed costs by 23% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should White undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)

See all solutions

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