Question

Cover-to-Cover Company

Contribution Margin Income Statement

For the Year Ended December 31

1	Sales			$424,000.00
2	Variable costs:
3	Manufacturing		$233,200.00
4	Selling		21,200.00
5	Administrative		63,600.00	318,000.00
6	Contribution margin			$106,000.00
7	Fixed costs:
8	Manufacturing		$5,000.00
9	Selling		4,000.00
10	Administrative		33,400.00	42,400.00
11	Income from operations			$63,600.00 Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31 1 Sales $424,000.00 2 Variable costs: 3 Manufacturing $169,600.00 4 Selling 16,960.00 5 Administrative 67,840.00 254,400.00 6 Contribution margin $169,600.00 7 Fixed costs: 8 Manufacturing $88,000.00 9 Selling 8,000.00 10 Administrative 10,000.00 106,000.00 11 Income from operations $63,600.00 Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement panels. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales. If required, round answers to the nearest dollar. 1. If Cover-to-Cover Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be? Points: 1 / 1 Feedback Check My Work Examine the differences between the two companies, including the differences in elements of the target profit formula. Explanation 2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be? Points: 0 / 1 Feedback Check My Work Examine the differences between the two companies, including the differences in elements of the target profit formula. Explanation 3. What would explain the difference between your answers for (1) and (2)? The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit. The companies have goals that are not in the relevant range.Selection incorrect. Group correctness is false. Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide income from operations.

Answer 1

Statement showing calculation of contribution for Cover-to-Cover
Sales	$424,000
Less: Variable cost	$318,000
Contribution	$106,000
Less: fixed cost	$42,400
Profit	$63,600
P/V Ratio	Contribution/Sales
	106000/424000
	25%

Statement showing calculation of contribution for Biblio Files
Sales	$424,000
Less: Variable cost	$254,400
Contribution	$169,600
Less: fixed cost	$106,000
Profit	$63,600
P/V Ratio	Contribution/Sales
	254400/424000
	40%

In order to Increase the profit by $30000, the companies need to increase their contribution by $30000, since all other costs are fixed.

Answer to part (1)

Current contribution	$106,000
+ Increase in profit	$30,000
Desired contribution (A)	$136,000
P/V Ratio (B)	25%
Desired Sales (A/B)	$544,000

Answer to Part (2)

Current contribution	$169,600
+ Increase in profit	$30,000
Desired contribution (A)	$199,600
P/V Ratio (B)	40%
Desired Sales (A/B)	$499,000

Answer to Part (3)

There is difference between sales of both the companies, since Bibloi has higher contribution per unit (40%) in comparison to Cover-to-Cover (25%).

In the initiation of any business every company wants to keep fixed cost at the minimum to minimize the risk, but as the business expands; keeping the variable cost at the minimal level is the best alternative as with each extra unit we get more contribution.

Please let me know in case more explanation is required.