Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended D
ID: 2541479 • Letter: C
Question
Cover-to-Cover Company
Contribution Margin Income Statement
For the Year Ended December 31, 20Y7
1
Sales
$424,000.00
2
Variable costs:
3
Manufacturing expense
$233,200.00
4
Selling expense
21,200.00
5
Administrative expense
63,600.00
318,000.00
6
Contribution margin
$106,000.00
7
Fixed Costs:
8
Manufacturing expense
$5,000.00
9
Selling expense
4,000.00
10
Administrative expense
33,400.00
42,400.00
11
Income from operations
$63,600.00
Income Statement - Biblio Files
Biblio Files Company
Contribution Margin Income Statement
For the Year Ended December 31, 20Y7
1
Sales
$424,000.00
2
Variable costs:
3
Manufacturing expense
$169,600.00
4
Selling expense
16,960.00
5
Administrative expense
67,840.00
254,400.00
6
Contribution margin
$169,600.00
7
Fixed Costs:
8
Manufacturing expense
$88,000.00
9
Selling expense
8,000.00
10
Administrative expense
10,000.00
106,000.00
11
Income from operations
$63,600.00
Sales Mix
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Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.
The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $346,962. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.
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Review the definition of break-even point.
Recall that the Combined unit contribution margin is given by [(Basic unit contribution margin) x (Basic percent of sales mix)] + [(Deluxe unit contribution margin) x (Deluxe percent of sales mix)]. Since these percents must add up to 100%, we have the following:
(Basic percent of sales mix) + (Deluxe percent of sales mix) = 100%, so that
(Deluxe percent of sales mix) = 100% - (Basic percent of sales mix)
Target Profit
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Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement panels. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.
1. If Cover-to-Cover Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?
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Examine the differences between the two companies, including the differences in elements of the target profit formula.
2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?
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Examine the differences between the two companies, including the differences in elements of the target profit formula.
3. What would explain the difference between your answers for (1) and (2)?
Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide income from operations.
The companies have goals that are not in the relevant range.
The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.
Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.
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Examine the differences between the two companies, including the differences in elements of the target profit formula.
Cover-to-Cover Company
Contribution Margin Income Statement
For the Year Ended December 31, 20Y7
Explanation / Answer
Part A - Sales Mix
Combined Contribution = $2.31 per unit
Fixed Cost = $346962
Combined Break even Point = ($346962/$2.31) = 150200 units
Break Even Basic Units = 'x'
Break Even Deluxe Units = 'Y'
X + Y = 150200 units
Contribution Margin Basic Product = ($5 - $1.75) = $3.25
Cobtribution Margin Deluxe Product = ($9 - $8.1) = $0.9
at Break Even, Contribution is equal to fixed cost
Contribution = Fixed cost
(x*$3.25) + (y*$0.9) = $346962
$3.25x + (150200 - x)*$0.9 = $346962
$3.25x + 135180 - $0.9x = $346962
$2.35x = $211782
x = 90120 units (Break Even Basic)
y = (150200 - 90120) = 60080 units (Break Even Deluxe)
Percentage of Sales Mix -
Basic = 90120/150200*100 = 60%
Deluxe = 60080/150200*100 = 40%
Break Even point in dollars-
Break even point in dollars = Break unit Units*Sales Price
Basic Break even point in dollars = 90120*$5 = $450600
Deluxe Break even point in dollars = 60080*$9 = $540720
Part B - Working
Estimated Sales = (Profit + Fixed cost)/Contribution Margin
Part 1 - Cover to Cover company
Profit = ($30000+$63600) = $93600
Contribution Margin = ($106000/$424000)*100 = 25%
Fixed Cost = $42400
Expected Sales = ($93600*$42400)/25% = $544000
Part 2 - Biblio Files Company
Profit = ($63600+$30000) = $93600
Contribution Margin = ($169600/$424000)*100 = 40%
Fixed cost = $106000
Expected Sales = ($106000+$93600)/40% = $499000
Part 3 - There is difference in answer of Part 1 and Part 2. Looking at the answers, Biblio files company is in better position
Answers are different because, Biblio files company has higher contribution margin ratio so more of each sales dollar is available to cover fixed cost and provide income from operations