Question

Projected number of motorcycles sold per year: 150

Projected number of snowmobiles sold per year: 125

Projected number of ATVs sold per year: 100

Projected average retail price of each motorcycle: $8,000

Projected average retail price of each snowmobile: $6,000

Projected average retail price of each ATV: $5,000

Projected total annual repair service revenue: $70,000

Variable Costs

Projected average cost of each motorcycle: $4,000

Projected average cost of each snowmobile: $4,500

Projected average cost of each ATV: $3,500

Sales commissions: 20% of retail product sales

Payroll taxes: Supplies: 12% of sales commissions paid

Supplies: 10% of repair service revenue

Fixed Costs

Advertising: $24,000
Alarm services fee: $1000
Bank fees: $2,400
Cleaning service: $3,200

Depreciation: $ 6,000
Dues and subscriptions: $ 1,000

Store manager salary: $40,000

Sales personnel base salaries: $24,000

Mechanic's annual salary: $40,000

Payroll taxes: 12% of payroll

Insurance: $4,000
Miscellaneous: $1,000
Legal and professional fees: $4,000

Office supplies and postage: $2,000

Payroll service fees: $2,000
Rent: $16,000
Telephone: $1,000
Training and education: $2,000

Utilities: $6,000

a. Prepare a contribution margin income statement that summarizes the dealership’s projected operating income.

b. Calculate the dealership’s projected break-even point in terms of total revenue (total revenue will equal the sum of product sales revenue and repair services revenue). Calculate the dealership’s margin of safety.

c. Assume that the dealership operates under the projections that were initially outlined with the exception of a change in compensation structure for sales personnel. Brad and Lewis intend to eliminate the base salaries for the dealership’s sales personnel and increase their commission to 30% of sales. Prepare a contribution margin statement based upon the modified compensation structure and calculate the company’s new break-even point in terms of total revenue.

Answer 1

REQ A:
CONTRIBUTION MARGIN INCOME STATEMENT
				M. CYCLE	S.MOBILES	ATV	REPAIRS	TOTAL
Units sold				150	125	100
Selling price				8000	6000	5000
Sales revenue				1200000	750000	500000
Service revenue							70,000	2,520,000
Less: variable cost:
Cost of sales
Mcycle(@4000)				600000
S.Mobile(@4500)					562500
ATV (@3500)						350000	0	1512500
Sales commission @20% of sales				240000	150000	100000	0	490000
payroll taxes @ 12% of commission				28800	18000	12000	0	58800
Supplies							7000	7000
Contribution margin				331200	19500	38000	63000	451700
Less: Fixed cost
Advertsing								24000
Alarm service								1000
bank fees								2400
Cleaning service								3200
Depreciation								6000
Dues and subscription								1000
Store manager salary								40000
Sales personnel base salaries								24000
Mechanic salaries								40000
payroll taxes								12480
Insurance								4000
Misc.								1000
Legal and professional fees								4000
Office supplies								2000
payroll servicce fees								2000
Rent								16000
Telephone								1000
Training								2000
Utilities								6000
NET OPEARTING INCOME								259620
Req b.
CM ratio: Total contribution/ Total revenue *100 = 451700 /2520000 *100 = 17.92%
Break even in $ = Total fixed cost / CM ratio= 192080/17.92% = $1071,875
Req C: Compensation modified
CONTRIBUTION MARGIN INCOME STATEMENT
				M. CYCLE	S.MOBILES	ATV	REPAIRS	TOTAL
Units sold				150	125	100
Selling price				8000	6000	5000
Sales revenue				1200000	750000	500000
Service revenue							70,000	2,520,000
Less: variable cost:
Cost of sales
Mcycle(@4000)				600000
S.Mobile(@4500)					562500
ATV (@3500)						350000	0	1512500
Sales commission @30% of sales				360000	225000	150000	0	735000
payroll taxes @ 12% of commission				43200	27000	18000	0	88200
Supplies							7000	7000
Contribution margin				196800	-64500	-18000	63000	177300
Less: Fixed cost
Advertsing								24000
Alarm service								1000
bank fees								2400
Cleaning service								3200
Depreciation								6000
Dues and subscription								1000
Store manager salary								40000
Mechanic salaries								40000
payroll taxes								9600
Insurance								4000
Misc.								1000
Legal and professional fees								4000
Office supplies								2000
payroll servicce fees								2000
Rent								16000
Telephone								1000
Training								2000
Utilities								6000
NET OPEARTING INCOME								12100
CM ratio : Contribution/ sales *100 = 177300 /2520000 *100 = 7.04%
Break even in $: Fixed cost / Cm ratio = 165200 /7.04% = $2346,591