Question

Contribution Margin

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 74,800 units during the year.

	Cover-to-Cover Company	Biblio Files Company
Contribution margin ratio (percent)	%	%
Unit contribution margin	$	$
Break-even sales (units)
Break-even sales (dollars)	$	$

Income Statement - Cover-to-Cover

Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$374,000
Variable costs:
Manufacturing expense	$224,400
Selling expense	18,700
Administrative expense	56,100	(299,200)
Contribution margin		$74,800
Fixed costs:
Manufacturing expense	$5,000
Selling expense	4,000
Administrative expense	9,700	(18,700)
Operating income		$56,100

Income Statement - Biblio Files

Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$374,000
Variable costs:
Manufacturing expense	$149,600
Selling expense	14,960
Administrative expense	59,840	(224,400)
Contribution margin		$149,600
Fixed costs:
Manufacturing expense	$75,500
Selling expense	8,000
Administrative expense	10,000	(93,500)
Operating income		$56,100

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

Type of Bookshelf	Sales Price per Unit	Variable Cost per Unit
Basic	$5.00	$1.75
Deluxe	9.00	8.10

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $323,400. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
Basic	%		$
Deluxe	%		$

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be?
$

2. If Biblio Files Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be?
$

3. What would explain the difference between your answers for (1) and (2)?

a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.

b. Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.

c. The companies have goals that are not in the relevant range.

d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

Answer 1

Contribution Margin

	Cover-to-cover Company	Biblio Files Company
Contribution Margin Ratio	20%	40%
Unit Contribution Margin	$              1.00	$              2.00
Break even Sales (Units)	18700	46750
Break even Sales (Dollars)	$         93,500	$       233,750

Contribution Margin Ratio = Contribution Margin / Sales
Unit Contribution Margin = Contribution Margin / Sales units
Break even sales units = Fixed Costs / Unit Contribution Margin
Break even sales dollars = Fixed Costs / Contribution Margin Ratio

Sales Mix
Break even units = Fixed Costs / Weighted Average Contribution Margin
= $323400 / 2.31 = 140000 units
Basic = 140000 x 60% = 84000 units.
Deluxe = 140000 x 40% = 56000 units

Type of Book Shelf	Percent of Sales Mix	Break Even units	Break Even Dollars
Basic	60%	84000	$       420,000
Deluxe	40%	56000	$       504,000

Target Profit

1.
Required Sales = ($74800+40000) / 20% = $574000

2.
Required Sales = ($149600+40000) / 40% = $474000

3.
Answer is a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income