Question

Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears below:

	Claimjumper				Makeover			Total
Sales	$	100,000			$	50,000		$	150,000
Variable expenses		37,000				8,000			45,000
Contribution margin	$	63,000			$	42,000			105,000
Fixed expenses									78,540
Net operating income								$	26,460

Required:

1. What is the overall contribution margin (CM) ratio for the company?

2. What is the company's overall break-even point in dollar sales?

3. Prepare a contribution format income statement at the company's break-even point that shows the appropriate levels of sales for the two products.

.

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 177,000 kilometers during a year, the average operating cost is 12.3 cents per kilometer. If a truck is driven only 118,000 kilometers during a year, the average operating cost increases to 15.5 cents per kilometer.

Required:

1. Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks.

2. Express the variable and fixed costs in the form Y = a + bX.

3. If a truck were driven 147,000 kilometers during a year, what total operating cost would you expect to be incurred?

Answer 1

Solution:(A):

(1) Calculation of overall Contribution margin ratio:

Overall Contribution margin ratio= Total contribution margin ÷ Total sales

= 105,000/150,000 = 0.7 or 70%

(2) Calculation of break-even point in dollars sales:

Break-even point($) = Total fixed expenses ÷ overall CM ratio = 78,540/0.7 = $112,200

To construct the required income statement, we must first determine the relative sales mix of the two products:

Particulars	Claimjumper	Makeover	Total
Original dollars sale	100,000	50,000	150,000
Percent of total	67%	33%	100%
Break-even sales($)	74,800	37,400	112,200

Note: Break even sales(Claimjumper)= 112200*67%

= $74,800(approx)

Break even sales(Makeover) = 112200*33%

= $37,400(approx)

Income statement

(At break-even point)

Particulars	Claimjumper ($)	Makeover($)	Total($)
Sales	74,800	37,400	112,200
Less: variable cost	27,676	5,984	33,660
Contribution margin	47,124	31,416	78,540
Less: Fixed expenses			78,540
Net operating income			$0

Note: Variable expense(Claimjumper) ;

= (37000*74800)/100,000 = $27,676

Variable cost (Makeover) = (8000*37400)/50000

= $5,984

Solution:(B):

(1) Calculation of variable and fixed operating cost:

Particulars	kilometres driven	Total annual cost($)
High level of activity	177,000	21,771
Low level of activity	118,000	18,290
Change	59,000	3,481

Note: Total annual cost = kilometres driven × Average Operating cost (in $) per km.

Therefore, variable Operating cost per kilometre;

= Change in cost ÷ change in activity

= 3481/59000 = $0.059

Therefore, the annual fixed Operating cost;

= Total fixed cost @177,000kms. - total variable cost@177,000kms.

= 21,771-(177000*0.059) = $11,328

(2) Following is the required expression of variable and fixed cost :

Y = 11,328 + 0.059X

(3) Total operating cost if the truck was driven 147,000 kms. = 11,328+(0.059*147000) = $20,001