Question

Vast Spirit

Calendars imprints calendars with college names. The company has fixed expenses of

$1,125,000

each month plus variable expenses of

$4.50

per carton of calendars. Of the variable​ expense,

75​%

is cost of goods​ sold, while the remaining

25​%

relates to variable operating expenses. The company sells each carton of calendars for

$19.50.

Read the requirements

LOADING...

.

Requirement 1. Compute the number of cartons of calendars that

Vast Spirit

Calendars must sell each month to breakeven.  

Begin by determining the basic income statement equation.

Sales revenue

-

Variable expenses

-

Fixed expenses

=

Operating income

Using the basic income statement equation you determined above solve for the number of cartons to break even.

The breakeven sales is

75,000

cartons.

Requirement 2. Compute the dollar amount of monthly sales

Vast Spirit

Calendars needs in order to earn

$338,000

in operating income.  

Begin by determining the formula.

(

Fixed expenses

+

Target operating income

) /

Contribution margin ratio

=

Target sales in dollars

​(Round the contribution margin ratio to two decimal​ places.)

The monthly sales needed to earn $338,000 in operating income is $

1,900,000

.

Requirement 3. Prepare the​ company's contribution margin income statement for June for sales of

485,000

cartons of calendars.

  

Vast Spirit
Contribution Margin Income Statement
Month Ended June 30
	Sales revenue				$9,457,500
	Variable expenses:
	Cost of goods sold			$1,636,875
	Operating expenses			545,625	2,182,500
	Contribution margin				7,275,000
	Fixed expenses				1,125,000
	Operating income				$6,150,000

Requirement 4. What is​ June's margin of safety​ (in dollars)? What is the operating leverage factor at this level of​ sales?

Begin by determining the formula.

Sales revenue

-

Sales revenue at breakeven

=

Margin of safety (in dollars)

The margin of safety is $

7,995,000

.

What is the operating leverage factor at this level of​ sales? Begin by determining the formula.

Contribution margin

/

Operating income

=

Operating leverage factor

​(Round the operating leverage factor to three decimal​ places.)

The operating leverage factor is

1.183

.

Requirement 5. By what percentage will operating income change if​ July's sales volume is

13​%

​higher? Prove your answer. ​(Round the percentage to two decimal​ places.)

If volume increases 13%, then operating income will increase

15.38

%.

Prove your answer. ​(Round the percentage to two decimal​ places.)

Original volume (cartons)
Add: Increase in volume
New volume (cartons)
Multiplied by: Unit contribution margin
New total contribution margin
Less: Fixed expenses
New operating income
vs. Operating income before change in volume
Increase in operating income
Percentage chang

Answer 1

1. Income statement equation

Sales

-

Variable expenses

-

Fixed expenses

=

Operating income

The breakeven sales is = Fixed expenses/ (Selling price - Variable cost)

= $1,125,000 / (19.50 - 4.50)

= 75,000 cartons

2.

Contribution margin ratio = Contribution/ Sales

= $15/ 19,50 = 76.92%

(

Fixed expenses

+

Target Operating income

)/

Contribution margin ratio

=

Target sales in dollars

The monthly sales needed to earn $312,000 in operating income is = ($1,125,000 + 338,000) / 76.92%

= $1,901,900

3. Contribution margin income statement

Sales revenue (485000 x $19,5)		$9,457,500
Variable expenses:
Cost of goods sold (4.50 x 75% x 485000)	$1,636,875
Operating expenses (4.50 x 25% x 485000)	545,625	2,182,500
Contribution margin		7,275,000
Fixed expenses		1,125,000
Operating income		$6,150,000

4.

Total sales

-

Breakeven sales

=

Margin of safety (in dollars)

The margin of safety is = $9,457,500 - ($19.50 x 75,000) = $7,995,000

Contribution margin

/

Net operating income

=

Operating leverage factor

The operating leverage factor is = $7,275,000 / $6,150,000 = 1.183

5. If volume increases 13%, then operating income will increase = 13% x 1.183 = 15.38%

Original volume (cartons)	485,000
Add: Increase in volume	63,050
New volume (cartons)	548,050
Multiplied by: Unit contribution margin	$15
New total contribution margin	$8,220,750
Less: Fixed expenses	-1,125,000
New operating income	$7,095,750
vs. Operating income before change in volume	$6,150,000
Increase in operating income	$945,750
Percentage change	15.38%