Contribution Margin Willie Company sells 39,000 units at $33 per unit. Variable costs are $22.11 per unit, and fixed costs are $191,100. Determine (a) the contribution margin ratio, (b) the unit contribution margin, and (c) operating income. a. Contribution margin ratio (Enter as a whole number.) fill in the blank ? % b. Unit contribution margin (Round to the nearest cent.) $ fill in the blank ? per unit c. Operating income $ fill in the blank ?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Contribution Margin
Willie Company sells 39,000 units at $33 per unit. Variable costs are $22.11 per unit, and fixed costs are $191,100.
Determine (a) the contribution margin ratio, (b) the unit contribution margin, and (c) operating income.
a. Contribution margin ratio (Enter as a whole number.) fill in the blank ? %
b. Unit contribution margin (Round to the nearest cent.) $ fill in the blank ? per unit
c. Operating income $ fill in the blank ?
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Break-Even Sales Under Present and Proposed Conditions
Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $190 per unit during the current year. Its income statement is as follows:
| Sales | $190,000,000 | ||
| Cost of goods sold | (102,000,000) | ||
| Gross profit | $88,000,000 | ||
| Expenses: | |||
| Selling expenses | $15,000,000 | ||
| Administrative expenses | 14,700,000 | ||
| Total expenses | (29,700,000) | ||
| Operating income | $58,300,000 |
The division of costs between variable and fixed is as follows:
| Variable | Fixed | |||
| Cost of goods sold | 70% | 30% | ||
| Selling expenses | 75% | 25% | ||
| Administrative expenses | 50% | 50% |
Management is considering a plant expansion program for the following year that will permit an increase of $11,400,000 in yearly sales. The expansion will increase fixed costs by $5,000,000 but will not affect the relationship between sales and variable costs.
Required:
1. Determine the total variable costs and the total fixed costs for the current year.
| Total variable costs | $fill in the blank ? |
| Total fixed costs | $fill in the blank ? |
2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
| Unit variable cost | $fill in the blank ? |
| Unit contribution margin | $fill in the blank ? |
3. Compute the break-even sales (units) for the current year.
fill in the blank ? units
4. Compute the break-even sales (units) under the proposed program for the following year. fill in the blank ? units
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $58,300,000 of operating income that was earned in the current year. fill in the blank ? units
6. Determine the maximum operating income possible with the expanded plant.
$ fill in the blank ?
7. If the proposal is accepted and sales remain at the current level, what will the operating income or loss be for the following year?
$ fill in the blank ? income or loss ?
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