In: Accounting
Contribution Margin Concepts
The following information is taken from the 2017 records of
Hendrix's Guitar Center.
Fixed | Variable | Total | ||
---|---|---|---|---|
Sales | $2,250,000 | |||
Costs | ||||
Goods sold | 1,012,500 | |||
Labor | $480,000 | 180,000 | ||
Supplies | 6,000 | 15,000 | ||
Utilities | 36,000 | 39,000 | ||
Rent | 72,000 | 0 | ||
Advertising | 18,000 | 73,500 | ||
Miscellaneous | 18,000 | 30,000 | ||
Total costs | $630,000 | $1,350,000 | (1,980,000) | |
Net income | $ 270,000 |
Required
(a.) Determine the annual break-even dollar sales volume.
Contribution margin ratio: Answer
Annual break-even dollar sales volumes: $Answer
(b.) Determine the current margin of safety in
dollars.
$Answer
(c.) Prepare a cost-volume-profit graph for the guitar shop. Label both axes in dollars with maximum values of $1,000,000. Draw a vertical line on the graph for the current ($750,000) sales level, and label total variable costs, total fixed costs, and total profits at $75,000 sales.
(d.) What is the annual break-even dollar sales volume if
management makes a decision that increases fixed costs by
$100,000?
$Answer
Answer:
(a)
sales =$2250000
Less: Variable cost:
goods sold =1012500
Labs = 180000
Supplies = 15000
Utilities = 39,000
Advertising = 73500
Miscelloneous = 30,000
Total variable cost = (1350000)
Contribution margin ratio = 900000
Contribution margin ratio = contribution margin / sales
= $900,000/$2250000
= 40%
Annual breakeven dollars sales volume = fixed cost /
contribution margin ratio
= $630000 / 40%
= $1575000
(b)
current marginal safety in dollar = current sales level - Break
even sales level
= $2250000 - $1575000
= $675000
(c)
Sales level | Total variable cost | Total fixed cost | Total profit |
2250000 | 1350000 | 630000 | 270000 |
2375000 | 1425000 | 630000 | 320000 |
2500000 | 1500000 | 630000 | 370000 |
2625000 | 1575000 | 630000 | 420000 |
2750000 | 1650000 | 630000 | 470000 |
2875000 | 1725000 | 630000 | 520000 |
(d)
Annual breakeven dollars sales volume = total fixed cost /
contribution margin
= ($630000 + $100000) / 40%
= $730000/40%
= $1825000