Part A-(14 marks) Sports Corporation produces the magical brand of basketballs.

Question

Part A-(14 marks) Sports Corporation produces the magical brand of basketballs. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below: $270,000 189,000 81,000 90,000 $(9,000) Fixed e Required: 1. Compute the company's contribution margin (CM) ratio. (4 marks) (6 marks) 3. The sales manager feels that an $8,000 increase in the monthly advertising budget, 2. Compute the company's break-even point in both units and dollars. combined with an intensified effort by the sales staff, will result in a $70,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthy net operating income or loss? (4 marks)

Explanation / Answer

1) Contribution margin ratio is the ratio of contribution margin to revenue

Contribution margin ratio = 81,000 / 270,000

Contribution margin ratio = 0.3

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2) break even point in units = fixed expenses / contribution margin

variable expense per unit = 189,000 / 13,500

variable expense per unit = 14

break even point in units = 90,000 / $ 20 - $ 14

break even point in units = 15,000 units

break even point in dollars = 15,000 x $ 20

break even point in dollars = $ 300,000

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3)

The company will start making profit by increasing the monthly advertising budget and will make a turnaround from loss to a profit making firm. Hence the sales manager is right in increasing the monthly advertising budget.

Sales $340,000 less : variable expenses 189,000 Contribution margin $151,000 less : fixed expenses $90,000 Less : advertising expense $8,000 Net operating profit $53,000

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