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Chapter 20: Q24E (page 1125)

Calculating contribution margin ratio, preparing contribution margin income statements For its top managers, Worldwide Travel formats its income statement as follows:

Worldwide鈥檚 relevant range is between sales of \(253,000 and \)368,000. Requirements

1. Calculate the contribution margin ratio.

2. Prepare two contribution margin income statements: one at the \(253,000 sales level and one at the \)368,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

Short Answer

Expert verified
  1. Contribution margin ratio is 57%
  2. Contribution at $253,000is$144,210 and $209,760at$368,000

Step by step solution

01

Calculation of contribution margin ratio

Contributionmarginratio=ContributionmarginNetsalesrevenue=$180,405$316,500=57%

02

Preparation of contribution margin income statements

Sales

$253,000

$368,000

Less:

Variable cost


localid="1656155930651" $136,095脳$253,000/$316,500=$108,790

$136,095脳$368,000/$316,500=$158,240

Contribution margin

$144,210

$209,760

Less: Fixed cost

$173,000

$173,000

Operating income

($28,790)

$36,760

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Most popular questions from this chapter

Calculating breakeven point in units, contribution margin ratio given

Ocean Company sells a product with a contribution margin ratio of 80%. Fixed costs are \(2,800 per month. What amount of sales (in dollars) must Ocean Company have to break even? If each unit sells for \)30, how many units must be sold to break even?

Question: Steve and Linda Hom live in Bartlesville, Oklahoma. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking, and Steve would leave his current job to be the ma卯tre d鈥�. The restaurant would serve dinner Tuesday through Saturday. Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning on using each table twice each evening, and the restaurant will be open 50 weeks per year. The Homs have drawn up the following estimates:

Average revenue, including beverages and desserts \( 45 per meal Average cost of food 15 per meal Chef鈥檚 and dishwasher鈥檚 salaries 5,100 per month Rent (premises, equipment) 4,000 per month Cleaning (linen, premises) 800 per month Replacement of dishes, cutlery, glasses 300 per month Utilities, advertising, telephone 2,300 per month

Requirements

1. Compute the annual breakeven number of meals and sales revenue for the restaurant.

2. Compute the number of meals and the amount of sales revenue needed to earn operating income of \)75,600 for the year.

3. How many meals must the Homs serve each night to earn their target profit of $75,600?

4. What factors should the Homs consider before they make their decision as to whether to open the restaurant?

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

What is operating leverage? What does it mean if a company has a degree of operating leverage of 3?

You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class.

You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales.

The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel鈥檚 $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship.

Requirements

1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal?

2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller?

3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently?

4. After considering all the factors, should you inform Barnhill or simply keep quiet?
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