ACC 406 Lecture Notes - Lecture 4: Contribution Margin, Earnings Before Interest And Taxes, Income Statement
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Question 1
Suppose that Head-First Company now sells both bicycle helmetsand motorcycle helmets. The bicycle helmets are priced at $74 andhave variable costs of $48 each. The motorcycle helmets are pricedat $215 and have variable costs of $130 each. Total fixed cost forHead-First as a whole equals $60,000 (includes all fixed factoryoverhead and fixed selling and administrative expense). Next year,Head-First expects to sell 4,850 bicycle helmets and 1,940motorcycle helmets.
Refer to the list below for the exact wording of text itemswithin your income statement.
| AmountDescriptions | |
| Operating income | |
| Operating loss | |
| Sales | |
| Total contribution margin | |
| Total fixed expense | |
| Total variable expense |
1. Form a package of bicycle and motorcycle helmets based on thesales mix expected for the coming year.
| Product | Price | Unit Variable Cost | Unit Contribution Margin | Sales Mix | Package Contribution Margin |
| Bicycle helmet | |||||
| Motorcycle helmet | |||||
| Package total |
2. Calculate the break-even point in units for bicycle helmetsand for motorcycle helmets.
| Break-Even Bicycle Helmets: | |
| Break-Even Motorcycle Helmets | : |
Check your answer by preparing a contribution margin incomestatement. Refer to the list of Amount Descriptions for the exactwording of text items within your income statement.
Head-First Company |
Contribution Margin Income Statement |
At Break-Even Point |
1 | ||
2 | ||
3 | ||
4 | ||
5 |
Question 2
Head-First Company now sells both bicycle helmets and motorcyclehelmets. Next year, Head- First expects to produce total revenue of$575,000 and incur total variable cost of $400,000. Total fixedcost is expected to be $60,500.
Refer to the list below for the exact wording of text itemswithin your income statement.
| AmountDescriptions | |
| Operating income | |
| Operating loss | |
| Sales | |
| Total contribution margin | |
| Total fixed expense | |
| Total variable expense |
. Calculate the break-even point in sales dollars forHead-First. Round the contribution margin ratio to four decimalplaces and sales to the nearest dollar.
The break-even point in sales equals .
Check your answer by preparing a contribution margin incomestatement. Refer to the list of Amount Descriptions for the exactwording of text items within your income statement.
Head-First Company |
Contribution Margin Income Statement |
At Break-Even Sales Dollars |
1 | ||
2 | ||
3 | ||
4 | ||
5 |
Contribution Margin Analysis:
We calculatecontribution margin by taking our sales revenue less our variablecosts. This basically tells us the portion of our sales that areavailable to cover the fixed cost of the business.
Contribution marginper unit is especially useful. We compute this by taking our salesrevenues per unit less our variable cost per unit. With this, wecan easily compute our break-even point.
Dog Day Care
Pricing at $18 per dog per day, you can expect to have 22 dogsper day
Pricing at $20 per dog per day, you can expect to have 15 dogsper day
Pricing at $25 per dog per day, you can expect to have 10 dogsper day
· Overnight Boarding
Pricing at $25 per dog per day, you can expect to have 12 dogsper day
Pricing at $28 per dog per day, you can expect to have 10 dogsper day
Pricing at $430 per dog per day, you can expect to have 7 dogsper day
Basic Groom
Pricing at $25 per dog per day, you can expect to have 5 dogsper day
Pricing at $30 per dog per day, you can expect to have 4 dogsper day
Pricing at $35 per dog per day, you can expect to have 3 dogsper day
Break-Even Analysis:
Break-even analysis isa key element of cost-volume-profit analysis. The technique ishelpful for new and small businesses to assess the viability oftheir start-up. However, it can also be quite beneficial forestablished businesses when evaluating new and existing productlines.
In this exercise, weare computing not only the break-even point but also the number ofunits that must be sold in order to earn given levels of targetprofit.
The break-even formulais:
Fixed Costs /Contribution Margin per Unit
The formula to computethe level required for a target profit is:
(Fixed Costs + TargetProfit) / Contribution Margin per Unit
We have alreadycomputed fixed costs for each area in our Milestone One. We will beusing these figures as follows:
Grooming, fixed costs:2,367.92
Daycare, fixed costs:859.39
Boarding, fixed costs:1,378.99
Our computations wouldthen be as follows:
Grooming
Sales Price $25
Break-even: 158
$1,000 Profit: 225
$1,500 Profit: 258
Sales Price $30
Break-even: 119
$1,000 Profit: 169
$1,500 Profit: 194
Sales Price $35
Break-even: 95
$1,000 Profit: 135
$1,500 Profit: 155
Daycare
Sales Price $18
Break-even: 65
$417 Profit: 97
$667 Profit: 116
Sales Price $20
Break-even: 57
$417 Profit: 84
$667 Profit: 101
Sales Price $25
Break-even: 43
$417 Profit: 64
$667 Profit: 76
Boarding
Sales Price $25
Break-even: 79
$583 Profit: 112
$909 Profit: 130
Sales Price $28
Break-even: 67
$583 Profit: 96
$909 Profit: 111
Sales Price $30
Break-even: 61
$583 Profit: 87
$909 Profit: 102
| Break-EvenAnalysis | ||||||||||||||||||
| Instructions - Showall steps and calculations to determine the break-even, as well asthe break-even for the target profit levels as outlined in theinstructions. Round all decimals UP to next wholenumber | ||||||||||||||||||
| Grooming | Day Care | Boarding | ||||||||||||||||
| Break-even Units= | Break-even Units= | Break-even Units= | ||||||||||||||||
| Fixed Costs | Fixed Costs | Fixed Costs | ||||||||||||||||
| Cont. Margin | Cont. Margin | Cont. Margin | ||||||||||||||||
