
1.
To identify: Break- even point of sales in dollars (a) existing business strategy and (b) new business strategy.
1.

Explanation of Solution
(a)
Existing business strategy
Given,
Fixed cost is $950,000.
Calculated values,
Contribution margin ratio is 55% or 0.55 (from working note).
Formula to calculate break-even point of sales in dollars,
Substitute $950,000 for fixed cost and 0.55 for contribution margin ratio.
Working note:
Given,
Total variable unit cost is $800,000.
Total variable packaging cost is $100,000.
Units sold are 100,000.
Selling price per unit is $20.
Calculation of total variable cost,
Calculation of variable cost per unit,
Calculation of contribution margin,
Compute contribution margin ratio.
Given,
Per unit selling price is $20.
Calculated values,
Unit contribution is $11.
Formula to calculate contribution margin ratio,
Hence, contribution margin ratio is 55%.
New business strategy
Given,
Fixed cost is $950,000.
Calculated values,
Contribution margin ratio is 55% or 0.55 (from working note).
Formula to calculate break-even point of sales in dollars,
Substitute $950,000 for fixed cost and 0.55 for contribution margin ratio.
Working note:
Given,
Selling price is $20.
Selling price decreased by 20%.
Volume of sales is 100,000.
Volume of sales increase by 80%.
Variable cost of packaging increases by 20%.
Variable cost of packaging is $100,000.
Calculation of decreased selling price,
Calculation of increased sales volume,
Calculation of variable cost per unit,
Calculation of increased variable packaging cost per unit,
Calculation of increased total variable packaging cost,
Calculation of variable cost per unit,
Calculation of decreased variable unit cost per unit,
Calculation of total variable unit cost,
Calculation of total variable cost,
Total variable cost per unit is $7.20
Calculation of contribution margin,
Compute contribution margin ratio.
Given,
Per unit selling price is $16.
Calculated values,
Unit contribution is $8.80.
Formula to calculate contribution margin ratio,
Hence, contribution margin ratio is 55%.
Hence, break-even point of sale of existing business strategy and new business strategy is $1,727,273 and $ 1,727,273.
2.
To prepare: A contribution margin income statement for the company.
2.

Explanation of Solution
Statement to show the contribution margin income statement
Company B | ||
Income Statement | ||
For the Year Ended December…. | ||
Particulars | Existing business strategy ($) | New business strategy ($) |
Sales | 2,000,000 | 2,880,000 |
Less: Variable Cost | 900,000 | 1,296,000 |
Contribution Margin | 1,100,000 | 1,584,000 |
Less: Fixed Cost | 950,000 | 950,000 |
Pre Tax Income | 150,000 | 634,000 |
Tax | 37,500 | 158,500 |
Net Income | 112,500 | 475,500 |
Table(1)
Working note:
Existing business strategy
Given,
The numbers of units sold is 100,000.
The selling price is $20.
Variable cost per unit is $9.
Calculation of total sales,
The total sales are $2,000,000.
Calculation of total variable cost,
The total variable cost is $900,000.
Calculation of tax,
New business strategy
Given,
The numbers of units sold is 180,000.
The selling price is $16.
Variable cost per unit is $7.20.
Calculation of total sales,
The total sales are $2,880,000.
Calculation of total variable cost,
The total variable cost is $1,296,000.
Calculation of tax,
Hence, the net income of Company B through existing business strategy and new business strategy is $112,500 and $475,500.
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