Question

 

Currently, the unit selling price of a product is $310, the unit variable cost is $250, and the total fixed costs are $918,000. A proposal is being evaluated to increase the unit selling price to $340.

a. Compute the current break-even sales (units).
units

b. Compute the anticipated break-even sales (units), assuming that the unit selling price is increased and all costs remain constant.
units

Break-Even Sales and Sales to Realize Income from Operations

For the current year ended October 31, Friedman Company expects fixed costs of $340,000, a unit variable cost of $40, and a unit selling price of $60.

a. Compute the anticipated break-even sales (units).
units

b. Compute the sales (units) required to realize income from operations of $78,000.
units

Contribution Margin and Contribution Margin Ratio

For a recent year, McDonald's Company-owned restaurants had the following sales and expenses (in millions):

Sales	$18,400
Food and packaging	$4,808
Payroll	4,600
Occupancy (rent, depreciation, etc.)	5,742
General, selling, and administrative expenses	2,700
	$17,850
Income from operations	$550

Assume that the variable costs consist of food and packaging, payroll, and 40% of the general, selling, and administrative expenses.

a. What is McDonald's contribution margin? Round to the nearest million. (Give answer in millions of dollars.)
$ million

b. What is McDonald's contribution margin ratio?
%

c. How much would income from operations increase if same-store sales increased by $1,100 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the closest million.
$ million

a. Young Company budgets sales of $1,120,000, fixed costs of $50,400, and variable costs of $224,000. What is the contribution margin ratio for Young Company? (Enter your answer as a whole number.)
%

b. If the contribution margin ratio for Martinez Company is 45%, sales were $555,000, and fixed costs were $199,800, what is the income from operations?

Answer 1

	(a)	(b)
	Existing	Proposed
Selling Price p.u.	$              310	340
Less: Variable Cost p.u.	$            (250)	$            (250)
Contribution p.u.	$               60	$               90
Fixed Cost	$       918,000	$       918,000
BEP = Fixed Costs / Contribution p.u.	15,300	10,200

Particulars	Result
Selling Price p.u.	$               60
Less: Variable Cost p.u.	$              (40)
Contribution p.u.	$               20
Fixed Cost	$      340,000
BEP = Fixed Costs / Contribution p.u. (a)	17,000
Desired Profit	$        78,000
Therefore Desired Contribution = Fixed Costs + Desired Profits	$       418,000
No. of units to be sold => Desired Contribution / Contribution p.u. (b)	20,900

Particulars		Result (in millions)
Sales		$         18,400
Less: Variable Costs
Food and Packaging	$         (4,804)
Payroll	$         (4,600)
Variable General, Selling and Administration OH => $2,700 x 40%	$          (1,080)
Total Variable Costs		$        (10,484)
Contribution Margin (a)		$            7,916
Contribution Margin Ratio (b) => Contribution Margin / Sales		43%

(c)

Particulars	Result (in millions)
Revised Sales	$         19,500
(x) Contribution Margin Ratio	43%
Contribution Margin	$           8,389
Less: Fixed Costs
Occupancy	$          (5,742)
General, Selling and Administration OH => 2,700 - 1080	$          (1,620)
Net operating income	$            1,027
Less: Previous Net operating income	$            (550)
Increase in Operating Income	$              477

Young Company
Particulars	Amount
Sales	$     1,120,000
Less: Variable Costs	$     (224,000)
Contribution Margin	$      896,000
Contribution Margin Ratio => Contribution Margin / Sales	1

Martinez Company
Sales	$       555,000
(x) Contribution Margin ratio	45%
Contribution Margin	$       249,750
Less: Fixed Costs	$      (199,800)
Income from Operations	$         49,950