Question

P7-66A CVP analysis at a multiproduct firm ( Learning objective 4 & 5)

The contribution margin income statement of Morgantown Coffe for October follows:

Morgan Coffee Contribution Margin Income Statement Month Ended October 31
Sales revenue		$      95,000
Less variable expense:
Cost of goods sold	$      33,500
Marketing expense	$      12,000
General administrative expense	$         2,000	$      47,500
Contribution margin		$      47,500
Less fixed expenses
Marketing expense	$      19,125
General administrative expense	$         3,375	$      22,500
Operating income		$      25,000

Morgantown Coffe sells three small coffees for every large coffee.
A small coffee sells for $2.00, with a variable expense of $1.00.
A large coffee sells for $4.00, with a variable expense of $2.00.
Requirements
1. Determine the coffee shop's monthly breakeven point in the numbers of small coffees amd large coffees.
Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales.
Show only two categories of expenses: Variable and fixed.
2. Compute the coffee shop's margin of safety in dollars.
3 Use the coffee shop's operating leverage factor (using the October contributionmargin income statement) to
determine its new operating income if sales volume increases 13%. Prove your results
using th contribution margin income statement format. Assume that sales mix remains unchanged.

Answer 1

Req 1:
Contribution margin per unit of Small coffee: $ 2.00 -1.00 = $ 1.00 per unit
Contrbution margin per unit of large coffee: $ 4.00 -2.00 =$2.00 per unit
Sales mix is 3:1 of Small and large coffee
Contribution margin of Sales mix: 3 units @1+ 1 unit @2$2 = $5 per sales mix.
Break even point in terms of sales mix: Fixed cost / Contribution margin per sales mix
			(22500 /5 ) = 4500 sales mix
To be break even point,			Number of units of Small coffee:4500*3 = 13500 units
			Number of units of large units: 4500*1 = 4500 units
Req 2:
Contrbution= $ 47500
Sales: $ 95,000
CM ratio: Contribution/ Sales *100 = 47500 /95000 *100 = 50%
Net Income: $ 25000
Margin of safety in $= Net income/ CM ratio = $25000 /50% = $50,000
Req 3:
Degree of Opeerating leverage: Contribution/ Net income = 47500/25000 =1.9
Now, if sales revenue increase by 13%
Net income increase by 24.7% (i.e. 13%*1.9)
CONTRIBUTION MARGIN INCOME STATEMENT:
Sales revenue (95000+13%)					107350
Less: Variable ccost (47500+13%)					53675
Contribution margin					53675
Less: Fixed cost					22500
Net income					31175
Less: original income					25000
Increase in income					6175
% increase in income					24.70%