# ADMS 1500 Lecture Notes - Lecture 6: Income Statement, Variable Cost, Contribution Margin

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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 |

In the month of March, Style Salon services 610 clients at anaverage price of $180. During the month, fixed costs were $25,758and variable costs were 70% of sales.

(a) Determine the contribution margin in dollars, per unit, andas a ratio.

Contribution margin | $____________? |

Contribution margin per unit | $____________? |

Contribution margin ration | ____________%? |

(b) Using the contribution margin technique, compute thebreak-even point in dollars and in units.

Break-even sales | $______________? |

Break-even sales | _____________ units? |