AFM102 Lecture Notes - Lecture 4: Contribution Margin, Earnings Before Interest And Taxes, Income Statement
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The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:
Direct Materials: $3.00
Direct Labor: $1.50
Variable Manufacturing Overhead: $0.40
Variable Selling Expenses: $1.10
Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.
1. Compute net income before tax.
2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.
3. Calculate the break-even point in units and dollars ofrevenue.
4. Calculate the margin of safety:
In units
In sales dollars
As a percentage
5. Calculate the degree of operating leverage.
6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.
7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.
8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.
| Requirement 1 | ||||
| Units | Price | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 2 | ||||
| Contribution Margin per Unitin Dollars = Selling Price â Variable Costs | ||||
| Selling Price | Variable Costs | Contribution Margin per Unit | ||
| Contribution Margin Ratio =Contribution Margin/Selling Price | ||||
| Contribution Margin | Selling Price | Contribution Margin Ratio | ||
| Requirement 3 | ||||
| Break-Even Point = Fixed Costs/ Contribution Margin | ||||
| Fixed Costs | Contribution Margin | Break-Even Point in Units (Rounded) | ||
| Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales | ||||
| Break-Even Point in Units | Selling Price per Unit | Break-Even Point in Sales (Rounded) | ||
| Requirement 4A | ||||
| Margin of Safety in Units =Current Unit Sales â Break-Even Point in Unit Sales | ||||
| Current Unit Sales | Break-Even Point in Sales | Margin of Safety in Units | ||
| Requirement 4B | ||||
| Margin of Safety in Dollars =Current Sales in Dollars â Break-Even Point Sales in Dollars | ||||
| Current Sales in Dollars | Break-Even Point in Dollars | Margin of Safety in Dollars | ||
| Requirement 4C | ||||
| Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales | ||||
| Margin of Safety in Units | Current Unit Sales | Margin of Safety Percentage | ||
| Requirement 5 | ||||
| Degree of Operating Leverage =Contribution Margin / Operating Income | ||||
| Contribution Margin | Operating Income | Operating Leverage | ||
| Requirement 6 | ||||
| Units | $ Per Unit | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Operating Leverage | Times % Increase | Increase would be XX% | ||
| Prior Income | $ | From Part 1 | ||
| Increase | $ | Prior Income X XX% Above | ||
| Total | $ | |||
| Requirement 7 | ||||
| Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin | ||||
| Fixed Costs + Target Income | Divided by Contribution Margin | # of Units (Rounded) | ||
| Fixed Costs | $ | |||
| Target Income | $ | |||
| Total | $ | $ | X | |
| # of Units Above X $ Per Unit | ||||
| Proof | Revenue | XX,XXX X $XX.XX | $ | |
| Variable Costs | XX,XXX X $X.XX | $ | ||
| Contribution Margin | $ | |||
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 8 | ||||
| Sales Mix | ||||
| Current | Specialty | Total | ||
| Expected Sales Units | X | X | ||
| Revenue = Sales X Price | $ | $ | $ | |
| Variable Costs X Units | $ | $ | $ | |
| Contribution Margin | $ | $ | $ | |
| Fixed Costs | $ | $ | $ | |
| Operating Income | $ | |||
| Prior Net Income FromRequirement 1 | $ | |||
| Additional Operating Income | (Operating Income Above Less Prior Income) | $ | ||
| Decision With Explanation | ||||
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 |
