Question

Lisa Rocks Ltd manufactures landscaping equipment. Below is an income statement in the traditional format for Lisa Rocks Ltd with a sales volume of 8,000 units.

Sales Revenue	32,000
Cost of goods sold ($6,000 + $2.10 per unit)	22,800
Gross Profit	9,200
Operating expenses:
Selling ($1,200 + $0.10 per unit)	2,000
Administration ($4,000 + $0.20 per unit)	5,600
Operating Profit	1,600

1. Prepare an income statement in the contribution margin format.
2. Calculate the contribution margin ratio.
3. Calculate operating profit/loss if the volume changes to 12,000 units.
4. Refer back to part (a) Calculate break-even in units AND in dollars. Show your workings.

Answer 1

Solution:

Requirement:A

Contribution format Income Statement
Particulars	Amount ($)	Amount ($)
Sales Revenue		$        32,000
Less: Variable Expenses
Cost of Goods Sold	$         16,800
Selling Expenses	$               800
Administrative Expenses	$           1,600
Total Variable Expenses		$        19,200
Contribution Margin		$        12,800
Less: Fixed Expenses
Cost of Goods Sold	$           6,000
Selling Expenses	$           1,200
Administrative Expenses	$           4,000	$        11,200
Net Operating Income		$           1,600

Requirement:B

Contribution Margin Ratio = [32000 - 19200] / 32000 = 40%

Requirement:C

Contribution format Income Statement
Particulars	Amount ($)	Amount ($)
Sales Revenue		$        48,000
Less: Variable Expenses
Cost of Goods Sold	$         25,200
Selling Expenses	$           1,200
Administrative Expenses	$           2,400
Total Variable Expenses		$        28,800
Contribution Margin		$        19,200
Less: Fixed Expenses
Cost of Goods Sold	$           6,000
Selling Expenses	$           1,200
Administrative Expenses	$           4,000	$        11,200
Net Operating Income		$           8,000

Requirement:D

Break-even in units = Fixed Cost / Contribution Margin per unit = $11,200 / 1.60 = 7000 Units

Break-even in dollars = Fixed Costs / Contribution Margin Ratio = $11,200 / 40% = $ 28,000