Question

Raven Company sells a single specialized product. The company’s sales andexpenses for a recent month are given below:

TOTAL

Sales $300,000

PER UNIT

$60 45 $15

Less Variable Expenses Contribution Margin Less fixed expenses Net Operating Income

Required:

180,000 120,000 70,000 $ 50,000

a) What is the monthly break-even point in units sold and in sales dollars?

b) Without resorting to computations, what is the total contribution margin at the

break-even point?

c) How many units would have to be sold each month to earn a minimum target profit of $25,000? Use the contribution margin method. Verify your answer by preparing a contribution income statement at the target level of sales.

d) What is the company’s CM ratio? If monthly sales increase by $50,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

(a) Monthly Break Even Point(in units sold) = Fixed cost/Contribution per unit

= $70,000/$15 = 4,666.67 units or $ 4,666 units

Monthly Break Even Point (in sales dollars) = Monthly Break Even Point (in units sold) * Selling

Price per unit

= 4,666 units * $60

= $ 280,000

(b) Total contribution margin at break even point = $15*4,666 units

= $70,000

(c) Units to be sold each month to earn minimum target profit of $ 25,000 = (Fixed Cost + Target Profit)/ Contribution per unit

= ($ 70,000 + $ 25,000)/$15 = 6,333.33 units or 6,333 units

Verfication of answer by Contribution Income Statement -

Sales (6,333 units * $60) = $ 380,000

Less : Varibale Cost (6,333 units * $ 45) = $ 285,000

Contribution = $ 95,000

Less : Fixed Cost = $ 70,000

Profit = $ 25,000   

(d) Company's CM Ratio = (Sales - Variable Cost )/ Sales  

= ($300,000-$180,000)/$300,000

= 0.40

If Monthly sales would increase by $ 50,000 i,e, when total sales would be $ 350,000,

Contribution = $ 350,000 * 0.40 = $140,000

Fixed Cost = $ 70,000

Net Operating Income = $140,000 - $70,000 = $70,000.

i.e. Net operating income would increase by $ 20,000 ($70,000- $50,000).