Question

Aldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The division's projected income statement for the coming year is: Sales (203,000 units @ $70) $14,210,000 Total variable cost 8,120,000 Contribution margin $6,090,000 Total fixed cost 4,945,500 Operating income $1,144,500 Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. Calculate the contribution margin ratio and use it to calculate the break-even sales revenue. (Note: Round contribution margin ratio to four significant digits, and round the break-even sales revenue to the nearest dollar.) Unit contribution margin $ Break-even point in units Contribution margin ratio Break-even sales revenue $ 2. The divisional manager has decided to increase the advertising budget by $250,000. This will increase sales revenues by $1 million. By how much will operating income increase or decrease as a result of this action? Use your answers from part 1 to determine the amountSuppose sales revenues exceed the estimated amount on the income statement by $1,500,000. Without preparing a new income statement, by how much are profits underestimated? Use your answers from part 1 to determine the amount

Answer 1

Answer 1.

Contribution Margin per unit = Contribution Margin / Number of units sold
Contribution Margin per unit = $6,090,000 / 203,000
Contribution Margin per unit = $30

Breakeven Point in units = Fixed Expenses / Contribution Margin per unit
Breakeven Point in units = $4,945,500 / $30
Breakeven Point in units = 164,850

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $30 / $70
Contribution Margin Ratio = 0.4286

Breakeven Point in sales revenue = Fixed Expenses / Contribution Margin Ratio
Breakeven Point in sales revenue = $4,945,500 / 0.4286
Breakeven Point in sales revenue = $11,538,731

Answer 2.

Increase in Fixed Costs = $250,000
Increase in Sales = $1,000,000

Increase in Operating Income = Increase in Sales * Contribution Margin Ratio - Increase in Fixed Costs
Increase in Operating Income = $1,000,000 * 0.4286 - $250,000
Increase in Operating Income = $178,600

Answer 3.

Excess of Sales Revenue = $1,500,000

Excess of Operating Income = Excess of Sales Revenue * Contribution Margin Ratio
Excess of Operating Income = $1,500,000 * 0.4286
Excess of Operating Income = $642,900

So, profits are underestimated by $642,900