Question

In this exercise, we will use our knowledge of the relationships between revenue, variable costs, fixed costs, contribution margin, operating margin, and unit charge or sales price. We will calculate the number of UOS we need to perform to break even, what the revenue needed to achieve a target operating income, and compute the contribution income statement to prove our results. Please use the Contribution Margin Method to arrive at your answers and show all your calculations for the answer and the proof.

Case 1:

The Laboratory Manager wants to know the number of lab test procedures it will take to achieve the desired operating income of $450,000 next year.

Data Assumptions:

Unit charge for each lab test $250

Variable cost per lab test $150

Total fixed costs $125,000

Please calculate the number of tests needed to be performed and the total revenue needed to achieve an operating income of $450,000. Then compute the contribution income statement method to prove your answers. Please show all calculations.

Case 2:

Now the Laboratory Manager wants to know how many of the lab test procedures will need to be performed to break even next year. Use the same data assumptions you have from the above example. Please calculate the number of lab tests needed to be done to break even and use the contribution income statement method to prove your answer. Please show all calculations.

Case 3:

The Laboratory Manager now wants to forecast what her operating income will be if the Lab performs 3,000 lab tests next year. Use the same data assumptions shown above and calculate the operating income for performing 3,000 tests using the contribution margin income statement method. Please show all calculations.

Rubric

Answer 1

Case 1: Desired Operating Income = $450,000

Add: Total Fixed Costs = $125,000

Desired Contribution Margin = $575,000

Contribution margin per Unit = Selling Price per Unit – Variable Cost per Unit

= 250-150

= $100

Hence, number of test required = 575,000/100

= 5,750

Contribution Margin Income Statement

Sales 250*5,750	1,437,500
Less: Variable Costs 150*5,750	862,500
Contribution Margin	575,000
Less: Fixed Costs	125,000
Operating Income	450,000

Case2: Break even tests = Fixed costs/Contribution Margin per Unit

= 125,000/100

= 1,250 tests

Contribution Margin Income Statement

Sales 250*1,250	312,500
Less: Variable Costs 150*1,250	187,500
Contribution Margin	125,000
Less: Fixed Costs	125,000
Operating Income	0

Case 3:

Contribution Margin Income Statement

Sales 250*3,000	750,000
Less: Variable Costs 150*3,000	450,000
Contribution Margin	300,000
Less: Fixed Costs	125,000
Operating Income	175,000

Hence, operating income will be $175,000