Question

The contribution margin income statement of Krazy Kustard Donuts for August 2016

Sales Revenue: $125,000

Variable Costs: COGS: $32,100, Selling Costs: $17,100, Administrative Costs: $800

Contribution Margin: $75,000

Fixed Costs: Selling Costs: $32,400, Administrative Costs: $10,800

Operating Income: $31,800

Krazy Kustard sells 4 dozen plain donuts for every dozen custard-filled donuts. A dozen plain donuts sells for $4.00, with total variable cost of $1.60 per dozen. A dozen custard-filled donuts sells for $8.00, with total variable cost of $ $3.20 per dozen.

1)Calculate the Weighted-Average Contribution margin.

2) Determine Krazy Kustard's monthly breakeven point in dozens of plain donuts and custard filled donuts. Prove your answer in preparing a summary contribution margin income statement at the breakeven level of sales. Show only 2 catagories of costs: Variable and fixed.

3)Compute Krazy Kustard's margin of safety in Dollars.

4)Compute the degree of operating leverage for Krazy Kustard Donuts. Estimate the new operating income if total sales increase by 40%. (Round the degree of operating leverage to 4 decimal places and the final answer to the nearest dollar. Assume the sales mix remains unchanged.)

5) Prove your answer to requirement 4 by preparing a contribution margin income statement with a 40% increase in total sales. (The sales mix remains unchanged)

Answer 1

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Requirement 1
		Plain Donuts	Custard-Filled Donuts	Total
Sales price per unit		$                                                      4.00	$                                 8.00
Variable cost per unit		$                                                      1.60	$                                 3.20
Contribution margin per unit		$                                                      2.40	$                                 4.80
Sales mix in units		4.00	1.00	5.00
Contribution margin		$                                                      9.60	$                                 4.80	$                                                                                 14.40
Weighted-average contribution margin per unit	$14.40/5 Units			$                                                                                   2.88
Requirement 2
Required sales in units:		Fixed costs + Target profit
Fixed Costs	$                                      43,200.00	Contribution margin per unit
Target Profit	$                                                      -
Sub total	$                                      43,200.00	$43,200 + $0
Weighted-average contribution margin per unit	$                                                 2.88	$2.88per unit
Required sales in units ($43,200/$2.88)	15,000
Required sales in plain donuts	15,000 units × 4/5	12,000.00	dz
Required Sales in custard-filled donuts	15,000 units × 1/5	3,000.00	dz
Sales Revenue	(12,000*$4)+(3,000*$8)	$                                            72,000.00
Variable Costs	(12,000*$1.6)+(3,000*$3.2)	$                                            28,800.00
Contribution Margin		$                                            43,200.00
Fixed Costs		$                                            43,200.00
Operating Income		$                                                           -
Requirement 3
Expected sales	$                                    125,000.00
Breakeven sales	$                                     -72,000.00
Margin of safety in dollars	$                                      53,000.00
Requirement 4
Degree of operating leverage:
Contribution margin	$                                      75,000.00	a
Operating income	$                                      31,800.00	b
	$                                            2.3585	a/b
Percent change in operating income:
Operating leverage	$                                                 2.36	a
Percent change in sales revenue	40%	b
	94.34%	a*b
Estimated operating income:
Operating income	$                                      31,800.00	a
Estimated operating income:	$                                      61,800.00	a*(1+0.9434)
Requirement 5
Sales Revenue	$125,000*1.40	$                                         175,000.00
Variable Costs	$50,000*1.40	$                                            70,000.00
Contribution Margin		$                                         105,000.00
Fixed Costs		$                                            43,200.00
Operating Income		$                                            61,800.00