Question

P18-2A Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio

and sales for target net income

Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle

to retailers, who charge customers 75 cents per bottle. For the year 2017, management estimates the following revenues

and costs.

Sales

$1,800,000

Selling expenses - variable

$70,000

Direct materials

430,000

Selling expenses - fixed

65,000

Direct labor

360,000

Administrative expenses - variable

20,000

Manufacturing overhead- variable

380,000

Administrative expenses - fixed

60,000

Manufacturing overhead -fixed

280,000

Instructions

(a)

Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)

(b)

Compute the break-even point in (1) units and (2) dollars.

(c )

Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.)

(d)

Determine the sales dollars required to earn net income of $180,000.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)

JORGE COMPANY

CVP Income Statement (Estimated)

For the Year Ending December 31, 2017

Sales

Value

Variable expenses

Cost of goods sold

?

Selling expenses

Value

Administrative expenses

Value

Total variable expenses

?

Contribution margin

?

Fixed expenses

Cost of goods sold

Value

Selling expenses

Value

Administrative expenses

Value

Total fixed expenses

?

Net income

?

(b)

Compute the break-even point in (1) units and (2) dollars.

(b)(1)

Break-even point in units

Unit selling price

Value

Unit variable costs

Value

Unit contribution margin

?

Fixed costs

Value

Unit contribution margin

Value

Break-even point in units

?

(b)(2)

Break-even point in dollars

Break-even point in units

Value

Unit selling price

Value

Break-even point in dollars

?

(c )

Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.)

Contribution margin ratio

Unit contribution margin

Value

Unit selling price

Value

Contribution margin ratio

?

Margin of safety ratio

Total sales

Value

Break-even sales

Value

Margin of safety (dollars)

Value

Total sales

Value

Margin of safety ratio

Value

(d)

Determine the sales dollars required to earn net income of $180,000.

Sales dollars required to earn target income

Fixed costs

Value

Target income

Value

Total fixed cost + target income

?

Contribution margin ratio

?

Sales dollars required

?

After you have completed P18-2A, consider the following additional question

1.

Assume that the unit selling price per bottle changed to $0.60 each, and fixed manufacturing costs

increased to $300,000. Show impact of these changes on calculations.

Answer 1

• All working forms part of the answer
• Per bottle sale price is $0.5
• Amounts are in $ (except units)
• Answer as required

	JORGE COMPANY
	CVP Income Statement (Estimated)
	For the Year Ending December 31, 2017
A	Sales			$1800000
	Variable expenses
	Cost of goods sold	1170000
	Selling expenses	70000
	Administrative expenses	20000
B	Total variable expenses			$1260000
C=A-B	Contribution margin			$540000
	Fixed expenses
	Cost of goods sold	280000
	Selling expenses	65000
	Administrative expenses	60000
D	Total fixed expenses			$405000
E=C-D	Net income			$135000
(b)	Compute the break-even point in (1) units and (2) dollars.
(b)(1)	Break-even point in units
	Unit selling price	$0.5
	Unit variable costs	$0.35
	Unit contribution margin	$0.15
	Fixed costs	$405000
	Unit contribution margin	$0.15
	Break-even point in units	2700000
(b)(2)	Break-even point in dollars
	Break-even point in units	2700000
	Unit selling price	$0.5
	Break-even point in dollars	$1350000
(c )	Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.)
	Contribution margin ratio
A	Unit contribution margin	$0.15
B	Unit selling price	$0.5
C=A/B x 100	Contribution margin ratio	30%
	Margin of safety ratio
A	Total sales	1800000
B	Break-even sales	1350000
C=A-B	Margin of safety (dollars)	450000
A	Total sales	1800000
D=C/A	Margin of safety ratio	25%
(d)	Determine the sales dollars required to earn net income of $180,000.
	Sales dollars required to earn target income
	Fixed costs	$405000
	Target income	$180000
A	Total fixed cost + target income	$585000
B	Contribution margin ratio	30%
C=A/B	Sales dollars required	$1950000

• Requirement (last)

If sale price changed to $0.6 and fixed manufacturing cost become $300000, then

Sales	[3600000 units x 0.6]		$2160000
Variable expenses
Cost of goods sold	1170000
Selling expenses	70000
Administrative expenses	20000
Total variable expenses			$1260000
Contribution margin			$900000
Fixed expenses
Cost of goods sold	300000
Selling expenses	65000
Administrative expenses	60000
Total fixed expenses			$425000
Net income			$475000