In: Accounting
Contribution Margin
Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 77,800 units during the year.
Cover-to-Cover Company |
Biblio Files Company |
|
Contribution margin ratio (percent) | fill in the blank % | fill in the blank ]% |
Unit contribution margin | $fill in the blank | $fill in the blank |
Break-even sales (units) | fill in the blank | fill in the blank |
Break-even sales (dollars) | $fill in the blank | $fill in the blank |
Feedback
Income Statement - Cover-to-Cover
Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8 |
||
Sales | $389,000 | |
Variable costs: | ||
Manufacturing expense | $233,400 | |
Selling expense | 19,450 | |
Administrative expense | 58,350 | (311,200) |
Contribution margin | $77,800 | |
Fixed costs: | ||
Manufacturing expense | $5,000 | |
Selling expense | 4,000 | |
Administrative expense | 10,450 | (19,450) |
Operating income | $58,350 |
Income Statement - Biblio Files
Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8 |
||
Sales | $389,000 | |
Variable costs: | ||
Manufacturing expense | $155,600 | |
Selling expense | 15,560 | |
Administrative expense | 62,240 | (233,400) |
Contribution margin | $155,600 | |
Fixed costs: | ||
Manufacturing expense | $79,250 | |
Selling expense | 8,000 | |
Administrative expense | 10,000 | (97,250) |
Operating income | $58,350 |
Sales Mix
Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.
Type of Bookshelf |
Sales Price per Unit |
Variable Cost per Unit |
Basic | $5.00 | $1.75 |
Deluxe | 9.00 | 8.10 |
The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $346,500. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.
Type of Bookshelf | Percent of Sales Mix | Break-Even Sales in Units | Break-Even Sales in Dollars |
Basic | fill in the blank 954ba6f59fe7052_1% | fill in the blank 954ba6f59fe7052_2 | $fill in the blank 954ba6f59fe7052_3 |
Deluxe | fill in the blank 954ba6f59fe7052_4% | fill in the blank 954ba6f59fe7052_5 | $fill in the blank 954ba6f59fe7052_6 |
Feedback
Target Profit
Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.
1. If Cover-to-Cover Company wants to increase
its profit by $30,000 in the coming year, what must their amount of
sales be?
$fill in the blank
2. If Biblio Files Company wants to increase
its profit by $30,000 in the coming year, what must their amount of
sales be?
$fill in
3. What would explain the difference between your answers for (1) and (2)?
a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.
b. Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.
c. The companies have goals that are not in the relevant range.
d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.
Contribution Margin
Cover-to-cover Company | Biblio Files Company | |
Contribution Margin Ratio | 20% | 40% |
Unit Contribution Margin | $ 1.00 | $ 2.00 |
Break even Sales (Units) | 19450 | 48625 |
Break even Sales (Dollars) | $ 97,250 | $ 243,125 |
Sales Mix
Type of Book Shelf | Percent of Sales Mix | Break Even units | Break Even Dollars |
Basic | 60% | 90000 | $ 450,000 |
Deluxe | 40% | 60000 | $ 540,000 |
Target Profit
1.
Amount of Sales required = ($19450+58350+30000) / 20% = $539000
2.
Amount of Sales Required = ($155600+30000) / 40% = $464000
3.
Answer is a. Biblio Files Company has a higher contribution margin
ratio, and so more of each sales dollar is available to cover fixed
costs and provide operating income.