Question

	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

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

Solution

Calculation of

(b)Break-even point in (1) units and (2) dollars

(c)Contribution margin ratio and the margin of safety ratio

(d)Sales dollars required to earn net income of $180,000

When, sale price changed to $0.60 and fixed manufacturing cost become $300000.

(b)Break-even point in (1) units and (2) dollars

(b1) Break-even point in units

= Fixed cost / Contribution per unit*

=$425000 / $ 0.25

=17, 00,000 units

(b2)Break-even point in dollars

= Selling Price per Unit × Break-even Sales Units

=$0.60 X 17, 00,000 units

=$ 1,020,000

*=Selling price per unit – Variable cost per unit

= $ 0.60- $1260000 / 3600000

=$ 0.60 - $ 0.35

=$ 0.25

(c) Contribution margin ratio

= (Selling price per unit – Variable cost per unit)/ Selling price per unit X 100

= ($ 0.60 - $ 0.35) / 0.60 X 100

=42%

Margin of safety ratio

= (Total sales- Break-even sales)/ Total sales X 100

= ($ 2160000-$ 10, 20,000) /$ 2160000 X 100

=$ 11, 40,000 /$ 2160000 X 100

=53%

(d) Sales dollars required to earn net income of $180,000

Sales dollars required to earn target income

= (Total fixed cost + target income) /Contribution margin ratio

= ($ 425000 + $180,000) /42%

=$ 605,000/42%

=$ 1,440,476

Table showing impact of chage in selling price and fixed cost

Particular	Before Change	After Changes When, sale price changed to $0.60 and fixed manufacturing cost become $300000.	Impact
(b)Break-even point
(1) units	27,00,000	17, 00,000	Decrease
(2) dollars	$1,350,000	$ 1,020,000	Decrease
(c)Contribution margin ratio	30%	42%	Increase
Margin of safety ratio	25%	53%	Increase
(d) Sales dollars required to earn net income of $180,000	$1,950,000	$ 1,440,476	Decrease