Question

The following is Antisdale Corporation's contribution format income statement for last month:

Sales		$             3,750,000
Variable expenses		1,687,500
Contribution margin		2,062,500
Fixed expenses		950,000
Net operating income		$             1,112,500

The company has no beginning or ending inventories and produced and sold 60,000 units during the month.

Required:

a. What is the company's contribution margin ratio?

b. What is the company's break-even in units?

c. If sales increase by 6,000 units, by how much should net operating income increase?

d. How many units would the company have to sell to attain a target profit of $1,525,000?

Answer 1

Ans. 1	Contribution margin ratio = Total contribution margin / Total sales * 100
	$2,062,500 / $3,750,000 * 100
	55%
Ans. 2	*First of all, we need to calculate the contribution margin per unit for the calculation of
	break even point in units.
	Contribution margin per unit = Contribution margin / Number of units sold
	$2,062,500 / 60,000
	$34.375	per unit
	Now we can calculate the break even point in units.
	Break even point in unit sales =   Fixed expenses / Contribution margin per unit
	$950,000 / $34.375
	27,636 units	(rounded)
Ans. 3	Incremental contriubtion margin = Contribution margin per unit *   Increase in Unit sales
	$34.375 * 6,000
	$206,250
	*Fixed cost does not change by the change in sales so the incremental contribution margin will be
	equal to the increase in net operating income.
	So, increase in net operaitng income is $206,250.
Ans. 4	Unit sales for target profit   =   (Fixed expense + Target profit) / Contribution margin per unit
	($950,000 + 1,525,000) / $34.375
	$2,475,000 / $34.375
	72,000 units