CVP analysis at a multiproduct firm (Learning Objectives 4 &5) The contribution
ID: 2410523 • Letter: C
Question
CVP analysis at a multiproduct firm (Learning Objectives 4 &5) The contribution margin income statement of Morgantown Coffee for October follows P7-66A Morgantown Coffee Contribution Margin Income Statement Month Ended October 31 4 5 6 Sales revenue Less variable expenses: 95,000 Cost of goods sold Marketing expense General and administrative expense 33,500 12,000 2,000 47,500 5 47,500 10 Contribution margin 11 Less fixed expenses: 12 13 14 Operating income 15 Marketing expense General and administrative expense $ 19,125 3,375 22,500 5 25,000 Morgantown Coffee sells three small coffees for every large coffee. A small coffee sells for $2.00, with a variable expense of $1.00. A large coffee sells for $4.00, with a variable expense of $2.00.Explanation / Answer
1. firts we need to convert the sales into small cups and large cups therefore
small cups =95000*0.75=$71250 is the sales from small cups
Large cups =95000*0.25=$23750 is the sales from large cups
for the calculation of break even point we assume all the sales are in small cups therefore
contribution=sales-variable cost
=$2-$1
contribution = $1
Break even = Fixed cost/ Contribution per unit
=22500/1
=22500 small cups will be required for reaching the break even point
now we need to distribute the small cups in to there ratio
Large cups will be
=(22500*0.25)/2
=2813 cups willl be required therefore for the break even small and large cup required will be
small cups = 16875 cups
Large Cups = 2813 cups
Income Statement at break even sales will be as follows
Sales revenue $45000
(16875*2)+(2812.5*4)
Variable cost -$22500
(16875*1)+(2813*2)
Contribution $22500
Fixed Cost -$22500
Operation Profit/Loss 0
2. Compute margin of safety in dollars
Margin fo safety in dollars= actual sales- Break even point
=95000-45000
Margin of safety (in dollars)=$50000
3. First we need to calculate the oprating leverage for the month od oct
operating leverage=(sales-variable cost)/profit
=(95000-47500)/25000
operating leverage =1.9
operating leverage factor=%change in EBIT/%change in sales
1.9=%change in EBIT/ 13%
1.9*13=Change in EBIT
Change in EBIT=24.7
therefore if there is 13 % increase in the sales there will be 24.7% increase in the operating income