Question

P5-2A Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio and sales for target net income Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2017, management estimates the following revenues and costs. Sales $1,800,000 Selling expenses - variable $70,000 Direct materials 430,000 Selling expenses - fixed 65,000 Direct labor 360,000 Administrative expenses - variable 20,000 Manufacturing overhead- variable 380,000 Administrative expenses - fixed 60,000 Manufacturing overhead -fixed 280,000

Instructions

(a) Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)

(b) Compute the break-even point in (1) units and (2) dollars.

(c ) Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.) (d) Determine the sales dollars required to earn net income of $180,000.

Answer 1

a.
Sales		18,00,000
Variable expenses:
cost of good sold (430000+360000+380000)	11,70,000
selling expenses	70,000
Admin exp	20,000
Total variable expense		12,60,000
Contribution margin		5,40,000
Fixed Expense:
Cost of good sold	2,80,000
selling expenses	65,000
Admin exp	60,000
Total fixed expense		4,05,000
Net Income		1,35,000
b.
Break even in units
Unit selling price	0.5
Unit variable cost	0.35	70% of sales
unit contribution margin	0.15
Fixed cost	405000
Break even in units	Fixed cost/contribution per unit
	405000/0.15
	27,00,000
Variable cost in % (variable cost/sales)
1260000/1800000
70%
Break even in dollars
Break even in units	27,00,000
Units selling price	0.5
Break even in dollars	13,50,000
(BEP in units*units sellin price)
c.
Contribution margin ratio
Unit contribution margin	$0.15
Unit selling price	$0.50
Contribution margin ratio	Contribution/sales
	30%
Margin of safety ratio
Margin of safety sales	Total sales-break even sales
	1800000-1350000
	450000
Margin of safety ratio	Margin of safety sales/total sales
	450000/1800000
	25%
d.
sales required for net income of 180000
Net income	1,80,000
Fixed cost from above	4,05,000
Contribution	5,85,000	30%	calculated in point c
Variable cost (585000/0.30*0.70)	13,65,000	70% of sales	calculated in point b
Total sales	19,50,000	100%
sales required for net income of 180,000 is $19,50,000