Question

PARAMETERS FOR BASELINE CASE
The following numbers are estimates for the upcoming year for a manufacturing company.
Since the company is effective at implementing a JIT inventory system, assume there is
no beginning or ending inventory.
No. of units sold	120,000
Selling price per unit	$240.00
	Fixed Expenses	Variable Expenses         (per unit sold
Production costs:
Direct materials		$18.00
Direct labor		36.00
Factory overhead	$2,160,000	24.00
Marketing expenses:
Sales salaries and commissions	540,000	7.50
Advertising	360,000
Miscellaneous mktg. expenses	108,000
Administration expenses:
Office salaries	720,000
Supplies	105,000	1.50
Miscellaneous admin. expenses	72,000
TOTAL EXPENSES	$4,065,000	$87.00

Prepare a contribution margin income statement (also called a variable-costing income statement) for the manufacturing company for the upcoming year. Key in proper headings.

Check figure: Operating profit (operating income) of $14,295,000.

Compute the company’s contribution margin per unit and contribution margin percentage for the upcoming year. The contribution margin percentage is calculated as contribution margin per unit / selling price per unit or as total contribution margin / total revenue. Make these calculations below your income statement. Clearly label these calculations.

Calculate the company’s breakeven point in units for the upcoming year. Make this calculation below your contribution margin calculations. Use Excel’s “round” function to round up to the nearest whole number. To do this, move your curser to the cell beside the decimal number and key in the following formula: =ROUNDUP(cell reference,0). The italicized cell reference means you need to key in the cell where the decimal number is located (e.g., F12). The number 0 means zero decimal places. Clearly label this calculation.

Calculate the company’s breakeven point in sales dollars for the upcoming year. Make this calculation below your breakeven calculation in units and use the company’s contribution margin percentage to make this calculation. Clearly label this calculation.

Answer 1

Solution:

Part 1 – Contribution Margin Income Statement

PARAMETERS FOR BASELINE CASE
Contribution Margin / Variable Costing Income Statement
	$$	$$
Sales Revenue (120,000 Units @ $240)		$28,800,000
Variable Cost:
Direct Materials (120,000 Units @ 18)	$2,160,000
Direct Labor (120,000 Units @ $36)	$4,320,000
Variable factory Overhead (120,000*$24)	$2,880,000
Variable selling expenses (120,000*7.50)	$900,000
Variable Administrative Expenses (120,000*1.50)	$180,000
Total Variable Cost		$10,440,000
Contribution Margin (Sales - Total Variable Cost)		$18,360,000
Total Fixed Costs		$4,065,000
Operating Profit		$14,295,000

Part 2 –

Contribution Margin Per Unit = Unit selling price – Unit total variable cost

= $240 - $87

= $153 per unit

Contribution Margin Percentage = Unit Contribution Margin / Unit Selling Price x 100

= $153 / $240 * 100

= 63.75%

Part 3 –

Break Even Point in units = Total Fixed Costs / Unit Contribution Margin

= $4,065,000 / $153

= 26,569 Units

Part 4 –

Break Even Point in dollars = Total Fixed Costs / Contribution Margin Percentage

= $4,065,000 / 63.75%

= $6,376,471

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