Question

1. ABC company prepared the following contribution format income statement based on a sales volume of 1,000 unites:

Sales	$25,000
Variable expenses	$15,000
Contribution margin	$10,000
Fixed expenses	$6,000
Net operating income	$4,000

a. Calculate contribution margin per unit, contribution margin ratio, and variable expense ratio. (5 points)

b. What would be the percentage increase in net operating income if sales volume increases by 50%? (5 points)

c. If the selling price increases by 10% and sales volume decreases by 10%, what would be the net operating income? (5 points)

d. What would be the break even point in unit sales if variable expenses per unit increases by 8% and fixed expenses increase by 10%? (5 points)

e. What is the margin of safety percentage? At what “percentage of sale volume decrease” the company would experience zero net operating income? (5 points)

Answer 1

			Working
a)	Contribution in unit= fixed cost/Contribution per unit	600	6000/10
	Contribution per unit= contribution/ sales units	10	10000/1000
	Contribution in units will be 600
	Contribution margin ratio= Contribution / sales	40%	.10000/25000
	Variable expenses ratio= variable expenses/sales	60%	.15000/25000
b)
	Sales	37500	37500
	Variable cost 60%	22500	37500 X60/100
	Contribution	15000	37500-22500
	Fixed cost	6000	6000
	Net profit	9000	15000-6000
	percentage of increase in net profit= new profit - old profit/ old profit	125%	(9000-4000)/4000
	Percentage of increase in net profit is 125%
c
	Sales	24750	900 X 27.5
	Variable cost	13500	900 X 15
	Contribution	11250	24750-13500
	Fixed cost	6000	6000
	Net operating income	5250	11250-6000
	Selling price revised	27.5	25+2.5
	Revised volume	900	1000-100
	Variable cost per unit= variable cost divided by units	15	15000/1000
d	BEP in units	750	6600/8.8
	Sales	25	25
	Variable cost	16.2	15+1.2
	Contribution	8.8	25-16.2
	Fixed cost	6600	6000+600
	BEP in units= fixed cost / Contribution per unit	750	6600/8.8
e	Margin of safety= Actual sales less BEP sales	10000	25000-15000
	MOS as percentage = Actual sales less BEP sales/ actual sales	40%	(25000-15000)/25000
	40% decrease in the sales volume then the company income will be zero
	BEP in units= fixed cost / Contribution per unit	600	6000/10
	BEP in value= BEP in units Multiplied with Selling price	15000	600 X 25