Question

Shown here is an income statement in the traditional format for a firm with a sales volume of 7,500 units. Cost formulas also are shown:

Revenues	$	34,100
Cost of goods sold ($5,600 + $2.15/unit)		21,725
Gross profit	$	12,375
Operating expenses:
Selling ($1,170 + $0.10/unit)		1,920
Administration ($3,650 + $0.20/unit)		5,150
Operating income	$	5,305

Required:

a. Prepare an income statement in the contribution margin format.

	Contribution Margin Income Statement Revenue $34,100 Variable expenses: Cost of goods sold $16,125 Selling expenses 750 Administrative expenses 1,500 Total variable expenses 18,375 Contribution margin 15,725 Fixed expenses: Cost of goods sold 5,600 Selling expenses 1,170 Administrative expenses 3,650 Total fixed expenses 10,420 $5,305

b. Calculate the contribution margin per unit and the contribution margin ratio. (Do not round intermediate calculations. Round contribution margin per unit to 2 decimal places.)

c-1. Calculate the firm's operating income (or loss) if the volume changed from 7,500 units to 11,250 units. (Do not round intermediate calculations.)

c-2. Calculate the firm's operating income (or loss) if the volume changed from 7,500 units to 3,750 units. (Do not round intermediate calculations.)

Refer to your answer to part a for total revenues of $34,100.

d-1. Calculate the firm’s operating income (or loss) if unit selling price and variable expenses per unit do not change and total revenues increase by $12,500. (Round intermediate calculations to 2 decimal places.)

d-2. Calculate the firm's operating income (or loss) if unit selling price and variable expenses per unit do not change and total revenues decrease by $3,500. (Round intermediate calculations to 2 decimal places.)

Answer 1

• All working forms part of the answer
• Requirement ‘b’

A	Contribution margin	$                             15,725.00
B	Units	7500
C = A/B	Contribution margin per unit	$                                        2.10
D	Sales	$                             34,100.00
E = A/D	Contribution Margin ratio	46.11%

• Requirement ‘c1’ and ‘c2’

Contribution Margin Income Statement
No. of units	7500		11250		3750
	Original Data [Req ‘a’]		Requirement “c- 1”		Requirement “c- 2”
Revenue		$               34,100.00		$                        51,150.00		$                                                 17,050.00
Variable expenses:
Cost of goods sold	$                             16,125.00		$                     24,187.50		$                     8,062.50
Selling expenses	$                                   750.00		$                       1,125.00		$                         375.00
Administrative expenses	$                               1,500.00		$                       2,250.00		$                         750.00
Total variable expenses		$               18,375.00		$                        27,562.50		$                                                    9,187.50
Contribution margin		$               15,725.00		$                        23,587.50		$                                                    7,862.50
Fixed expenses:
Cost of goods sold	$                               5,600.00		$                       5,600.00		$                     5,600.00
Selling expenses	$                               1,170.00		$                       1,170.00		$                     1,170.00
Administrative expenses	$                               3,650.00		$                       3,650.00		$                     3,650.00
Total fixed expenses		$               10,420.00		$                        10,420.00		$                                                 10,420.00
Net Operating Income		$                 5,305.00		$                        13,167.50		$                                                 (2,557.50)

• Requirement ‘d’

Working

A	Contribution margin	$                             15,725.00
B	Net Operating Income	$                               5,305.00
C = A/B	Degree of Operating Leverage	2.964184731

Working and Answer:

Working		Answer d-1	Answer d-2
A	Increase (Decrease) in Revenue	$                             12,500.00	$               (3,500.00)
B	Original Sales Revenue	$                             34,100.00	$               34,100.00
C = (A/B)x100	% Increase (Decrease) In Sales Revenue	36.66%	-10.26%
D	Degree of Operating Leverage	2.964184731	2.964184731
E = C x D	% Increase (Decrease) in Operating Income	108.66%	-30.42%
F	Original Operating Income	$                               5,305.00	$                 5,305.00
G = F + (FxE)	New Operating Income	$                             11,069.30	$                 3,691.00