Question

Gulf Shore Lawn and Garden Maintenance provides two general outdoor services: lawn maintenance and garden maintenance. The company charges customers $16 per hour for each type of service, but lawn maintenance has higher variable costs ($7 per hour) than garden maintenance ($5 per hour) because of fuel expenses incurred to operate lawn-mowing equipment. All employees are paid a fixed monthly salary. A contribution format income statement for a recent month for the two services appears below. During the month, 7,000 hours of lawn maintenance services and 3,000 hours of garden maintenance were provided:

	Lawn Maintenance			Per Hour			Garden Maintenance			Per Hour			Total
Sales	$	112,000		$	16		$	48,000		$	16		$	160,000
Variable expenses		49,000			7			15,000			5			64,000
Contribution margin	$	63,000		$	9		$	33,000		$	11			96,000
Fixed expenses														64,800
Operating income													$	31,200

Required:
1.	Compute the overall CM ratio for the company.

2.	Compute the overall break-even point for the company in sales dollars.

3.	Compute the weighted-average CM per hour for the company. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

       

4.	Calculate the overall break-even point for the company in hours.

       

5.	At the overall break-even point in total hours, how many hours of each service must be provided for the company to break-even?

       

6.	Calculate the overall sales in dollars required to earn an after-tax profit of $42,000 if the tax rate is 30%.

Answer 1

Answer

1.

Overall CM Ratio = Total Contribution Margin / Total Sales

= 96,000 / 160,000

Overall CM Ratio = 60%

2.

Overall Breakeven point (In sales) = Total Fixed Expenses / Overall CM Ratio

= 64,800 / 60%

Overall Breakeven point (In sales) = $108,000

3.

Product	Sales	Weight = Individual Sales / Total sales	Contribution Margin per unit	Weighted Average = (Weight * Contribution margin)
Lawn	112,000	70%	9	6.3
Garden	48,000	30%	11	3.3
Total	160,000	100%		10

Weighted-Average CM per hour = $10

4.

We know that company requires $108,000 sales to Breakeven.

So lets take breakeven Hours of Lawn = x

Breakeven Hours of Garden = y

So

Breakeven sales of Lawn + Breakeven sales of Garden = $108,000

($16 * x) + ($16 * y) = $108,000

$16x + 16y = $108,000

$16 (x +y) = $108,000

(x +y) = 6750 hours

So company needs 6750 hours of Both Lawn and Garden to Breakeven.

5.

We know that Contribution margin at Breakeven hours is equal to Fixed Cost,

(Contribution Margin = Fixed Cost) = Breakeven point

So above we find out that Lawn and Garden hours to Breakeven is 6,750 Hours.

Contribution Margin of lawn + Contribution Margin of Garden = $64,800

So let’s take breakeven Hours of Lawn = x

Breakeven Hours of Garden = y

(Contribution margin per unit of Lawn * x) + (Contribution margin per unit of Garden * x) = 64,800

($9 * x) + ($11 * y) = 64,800

9x + 11y = 64,800

Putting Value of (x = 6750 – y) from equation in 4^th part

[9 * (6750 – y)] + 11y = 64,800

60,750 – 9y + 11y = 64,800

2y = 4,050

Y = 2,025 Hours

We need 4,725 Hours of Lawn and 2,025 hours of Garden to Breakeven

6.

Income before Tax = Income after tax / (1- Tax)

= $42,000 / (1 – 0.3)

Income before Tax = $60,000

To earn $42,000 we need to earn $60,000 (Before Tax)

Overall Contribution margin to earn $42,000 profit = Before Tax profit + Fixed Cost

= 60,000 + 64,800

Overall Contribution margin to earn $42,000 profit = 124,800

We know that CM ratio is 60%, that means company contribution margin is 60% of sales,

So

Sales = Contribution Margin / CM ratio

= 124,800 / 60%

Overall Sales to earn after-tax profit of $42,000 = $208,000