Question

Income Statement - Cover-to-Cover

Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$374,000
Variable costs:
Manufacturing expense	$224,400
Selling expense	18,700
Administrative expense	56,100	(299,200)
Contribution margin		$74,800
Fixed costs:
Manufacturing expense	$5,000
Selling expense	4,000
Administrative expense	9,700	(18,700)
Operating income		$56,100

Income Statement - Biblio Files

Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$374,000
Variable costs:
Manufacturing expense	$149,600
Selling expense	14,960
Administrative expense	59,840	(224,400)
Contribution margin		$149,600
Fixed costs:
Manufacturing expense	$75,500
Selling expense	8,000
Administrative expense	10,000	(93,500)
Operating income		$56,100

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

Type of Bookshelf	Sales Price per Unit	Variable Cost per Unit
Basic	$5.00	$1.75
Deluxe	9.00	8.10

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $328,020. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
Basic	%		$
Deluxe	%		$

Feedback

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be?
$

2. If Biblio Files Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be?
$

Answer 1

Weighted average contribution Margin = Contribution Margin from product 1*Weight of Product 1 + Contribution Margin from Product 2*Weight of Product 2
Let the weight of Basic be x
2.31 = 3.25*x + 0.9*(1-x)
2.31 = 3.25x + 0.9 - 0.9x
x = 0.6 i.e. 60%
Hence, weight of basic = 60%, Deluxe = 40%
Overall Break even sales In units = Fixed costs/Weighted average CM per unit
=328,020/2.31 = 142,000 units
Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
Basic	60%	85,200	426,000
Deluxe	40%	56,800	511,200
Cover to Cover
Contribution Margin ratio = 74800/374000	20%
Desired Sales = (Desired Profit + Fixed costs)/CM ratio	574,000
2.Biblio
Contribution Margin ratio	40%
Desired Sales = (Desired Profit + Fixed costs)/CM ratio	474,000