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QUESTION:

The contribution margin income statement of Top of the Crop Coffee for January follows

Top of the Crop Coffee
Contribution Margin Income Statement
Month Ended January 31
Sales revenue
$144,000
Less variable expenses:
 
 
Cost of goods sold
$62,500
 
Marketing expense
7,000
 
General and administrative expense
2,500
72,000
Contribution margin
 
$72,000
Less fixed expenses:
 
 
Marketing expense
$35,700
 
General and administrative expense
6,300
42,000
Operating income
 
$30,000
Requirements





ANSWER:

Requirement 1. Determine the coffee​ shop's monthly breakeven point in the numbers of small coffees and large coffees. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of​ expenses: variable and fixed.
Begin by identifying the formula to compute the total breakeven point in units.​ (Abbreviations used: avg.​ = Average; CM​ = Contribution​ margin.)
(
Fixed expenses
+
Operating income
) ÷
Weighed-avg. CM per unit
=
Breakeven sales in units
Part 2
Now calculate the​ weighted-average contribution margin per unit. ​(Round the​ weighted-average contribution margin per unit to the nearest​ cent.)
 
 
Small
Large
Total
Sales price per unit
$3.00
$5.00
 
Less:
Variable expense per unit
(1.50)
(2.50)
 
Contribution margin per unit
$1.50
$2.50
 
Sales mix in units
3
1
4
Contribution margin
$4.50
$2.50
$7.00
Weighted-average contribution margin per unit
 
 
$1.75
Part 3
The breakeven point is
18,000
small cups and
6,000
large cups of coffee.
Part 4
Prepare a summary contribution margin income statement to prove your answer above. ​(Complete all input fields. For amounts with a​ $0 balance, make sure to enter​ "0" in the appropriate input​ field.)
 
Small
Large
Total
Sales revenue
$54,000
$30,000
$84,000
Less:
Variable expenses
(27,000)
(15,000)
(42,000)
Contribution margin
$27,000
$15,000
42,000
Less:
Fixed expenses
 
 
(42,000)
Operating income
 
 
$0
Part 5
Requirement 2. Compute the coffee​ shop's margin of safety in dollars.
Identify the formula to compute the margin of safety in dollars.
 
Sales
-
Breakeven sales in dollars
=
Margin of safety in dollars
 
Part 6
The margin of safety in dollars is
$60,000
.
Part 7
Requirement 3. Use the coffee​ shop's operating leverage factor​ (using the
January
contribution margin income​ statement) to determine its new operating income if sales volume increases
16 %.
Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged.
Identify the formula to compute the operating leverage factor.
 
Contribution margin
÷
Operating income
=
Operating leverage factor
 
Part 8
​(Round your answer to two decimal​ places.)
Top of the Crop Coffee's operating leverage factor is
2.40
.
Part 9
If Top of the Crop Coffee can increase sales revenue by 16%, keeping the sales mix the same, operating income
will be
$41,520
.
Part 10
Prepare a summary contribution margin income statement to prove your answer above. ​(For amounts with a​ $0 balance, make sure to enter​ "0" in the appropriate input​ field.)

Top of the Crop Coffee
Effect on Operating Income of 16% Increase in Sales Volume
 
 
Current level
Percent increase
Dollar increase
Sales revenue
$144,000
16%
$23,040
Less:
Variable expenses
72,000
16%
11,520
Contribution margin
 
 
11,520
Change in fixed expenses
 
 
0
Operating income before sales increase
 
 
30,000
Operating income after sales increase
 
 
$41,520

Posted by Cleveland on September 29, 2024
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