Question

Shown below is an income statement in the traditional format for April Corp. that sells a single product having a sales volume of 15,000 units. Cost formulas are also shown (for example, COGS includes fixed costs of $23,000 and variable costs of $3.20 per unit):

Sales ………………………………………………………………… $108,000

Cost of goods sold ($23,000 + $3.20 per unit) ……………………… (71,000)

Gross profit ………………………………………………………… $ 37,000

Operating expenses: Selling ($9,000 + $0.82 per unit) …………………………………… (21,300)

Administrative ($12,800 +$0.07 per unit)…………………………… (13,850)

Operating income …………………………………………………… $ 1,850

a. Prepare an income statement in the contribution margin format.

b. Calculate the contribution margin per unit and contribution margin ratio.

c. Calculate the firm's break even point in units.

Answer 1

a)			Contribution Margin Income Statement
				($)	($)
	Sales				108,000
	Less :- Variable Expenses
		Cost of Goods Sold (15,000 units * $ 3.20)		48,000
		Operating Expenses (15,000 units * $ 0.82)		12,300
		Administrative Expenses ( 15,000 units * $ 0.07)		1,050	61,350
	Contribution Margin				46,650
	Less :- Fixed Cost
		Cost of Goods Sold		23,000
		Operating Expenses		9,000
		Administrative Expenses		12,800	44,800
	Operating Income				1,850
	*	Variable Expenses are calculated as Sales Volume (Units) * Variable cost per unit
	**	Fixed Cost are given directly in question
b)	Contribution Margin per Unit = Revenue per unit - Total Variable Cost per Unit
	Revenue per Unit = Total Sales Amount / Sales Volume units
	Total Sales = $ 108,000
	Sales Volume = 15,000 units
	So, Revenue per unit = $108,000 / 15,000 units
	=	$ 7.2
	Total Variable Cost per unit = Variable Cost of Goods Sold per unit + Variable Operating Expenses per unit + Variable Administration Expenses per unit
	Variable	Cost of Goods Sold	$ 3.20
	Variable	Operating Expenses	$ 0.82
	Variable	Administrative Expenses	$ 0.07
	Total Variable Cost per unit		$ 4.09
	So, Contribution Margin per Unit = $ 7.20 - $ 4.09
		=	$ 3.11
	Contibution Margin Ratio = Contribution / Sales
		or
	Contibution Margin Ratio = (Sales - Variable Cost) / Sales
	Contribution or (Sales - Variable Cost) = $ 46,650   ,,,,, Calculated in part (a)
	Sales = $ 108,000
	So, Contribution Margin Ratio = $ 46,650 / $108,000
		=	43.20%
c)	Break Even Point ( in Unit) = Total Fixed Costs / (Sales per Unit - Total variable Costs per unit)
	Total Fixed Costs		($)
		Cost of Goods Sold	23,000
		Operating Expenses	9,000
		Administrative Expenses	12,800
			44,800
	Sales per unit = $108,000 / 15,000 units
	=	$ 7.2
	Variable	Cost of Goods Sold	$ 3.20
	Variable	Operating Expenses	$ 0.82
	Variable	Administrative Expenses	$ 0.07
	Total Variable Cost per unit		$ 4.09
	Break Even Point ( in Unit) = $ 44,800 / ( $ 7.2 - $ 4.09 )
		=	14,405 units