Question

Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Sales	$	70,000
Variable expenses		38,500
Contribution margin		31,500
Fixed expenses		23,310
Net operating income	$	8,190

5. If sales decline to 900 units, what would be the net operating income?

6. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income?

If the variable cost per unit increases by $1, spending on advertising increases by $1,600, and unit sales increase by 220 units, what would be the net operating income?

What is the break-even point in unit sales?

Answer 1

Ans. 5	Selling price per unit = Sales / Sales units
	$70,000 / 1,000	$70 per unit
	Variable cost per unit = Variable expense / Sales units
	$38,500 / 1,000	$38.50 per unit
	Contribution margin per unit = Selling price - Variable cost per unit
	$70 - $38.50   =   $31.50 per unit
	Particulars	Amount
	Sales (900 *$70)	$63,000
	Variable expenses (900 * $38.50)	-$34,650
	Contribution margin	$28,350
	Fixed expenses	($23,310)
	Net operating income	$5,040
	Net operating income will be $5,040 on this level (900 units) of sales.
Ans. 6	New selling price ($70 + $2) = $72 per unit
	Sales volume (1,000 - 100)   =   900 units
	Particulars	Amount
	Sales (900 *$72)	$64,800
	Variable expenses (900 * $38.50)	-$34,650
	Contribution margin	$30,150
	Fixed expenses	($23,310)
	Net operating income	$6,840
	Net operating income will be $6,840 after the change in sales volume and selling price.
Ans.	New variable cost per unit ($38.50 + $1) = $39.50 per unit
	Sales volume (1,000 + 220)   =   1,220 units
	Advertising is a fixed expenditure so it will increase the total fixed expenses.
	New fixed expenses ($23,310 + $1,600)   =   $24,910
	Particulars	Amount
	Sales (1,220 *$70)	$85,400
	Variable expenses (1,220 * $39.50)	($48,190)
	Contribution margin	$37,210
	Fixed expenses	-$24,910
	Net operating income	$12,300
Ans.	Break even point in units   =    Total fixed cost / Contribution margin per unit
	$23,310 / $31.50
	740 units