Chapter 6, Problem 20E

To determine

(a)

Contribution Margin:

The margin of profit which is computed after considering the variable cost only and not the fixed costis known as contribution. In other words, it means the contribution made by selling the product after covering its variable cost to the company.

The contribution margin ratio.

Answer to Problem 20E

The contribution margin ratio is $40\%$.

Explanation of Solution

Contribution Margin Income Statement:

Particulars	Amount
Revenue	$\$400,000$
Total variable cost	$\left(\$240,000\right)$
Total Contribution Margin	$\$160,000$

$\begin{array}{c}\text{Contribution Margin Ratio}=\frac{\text{Sales price}-\text{Variable cost}}{\text{Sales price}}\\ =\frac{\$400,000-\$240,000}{\$400,000}\\ =40\%\end{array}$

To determine

(b)

Concept introduction:

Breakeven Point:

The level of sales where the company is neither on profit nor loss is termed as breakeven point. In other words, that level of sales at which the fixed cost of the business is recovered.

To compute:

The breakeven point if the fixed cost is $\$80,000$.

Answer to Problem 20E

The breakeven point is $\$200,000$.

Explanation of Solution

Particulars	Amount
Sales Price $\left(\text{A}\right)$	$\$400,000$
Variable Cost per Canoe $\left(\text{B}\right)$	$\left(\$240,000\right)$
Contribution Margin $\left(\text{A}-\text{B}\right)$	$\$160,000$
Breakeven Sales	$\$200,000$

The break-even point in units is calculated as:

$\begin{array}{c}\text{Breakeven Point}=\frac{\text{Fixed Cost}}{\text{Contribution Margin Ratio}}\\ =\frac{\$800,000}{40\%}\\ =\$200,000\end{array}$

To determine

(c)

Concept introduction:

Target Profit:

The target profit is that profit which a company decides to achieve and this analysis helps in determinig the level of sales by which this target can be achieved.

The total sales to achieve target profit of $\$90,000$.

Answer to Problem 20E

The target sale point is $\text{\$425,000}$.

Explanation of Solution

Contribution Margin Income Statement:

Particulars	Amount
Sales Price $\left(\text{A}\right)$	$\$400,000$
Variable Cost per Canoe $\left(\text{B}\right)$	$\left(\$240,000\right)$
Contribution Margin $\left(\text{A}-\text{B}\right)$	$\$160,000$

The number units to be sold for achieving the target profit are calculated as:

$\begin{array}{c}\text{Target Sales}=\frac{\text{Fixed Cost}+\text{Target Profit}}{\text{Contribution Margin Ratio}}\\ =\frac{\$80,000+\$90,000}{40\%}\\ =\$425,000\end{array}$

To determine

(d)

Concept introduction:

Target Profit:

The target profit is that profit which a company decides to achieve and this analysis helps in determinig the level of sales by which this target can be achieved.

The sale revenue from each product to achieve target profit of $\$90,000$.

Answer to Problem 20E

The sale revenue from each product is divided as per their percentage ratio product mix which amounts to $\text{\$425,000}$. The share of sale of each product i.e. Thermos A, Thermos B, and Thermos C will be $\$148,750$, $\$191,750$, and $\$85,000$ respectively.

Explanation of Solution

The number units to be sold for achieving the target profit are calculated as:

$\begin{array}{c}\text{Target Sales}=\frac{\text{Fixed Cost}+\text{Target Profit}}{\text{Contribution Margin Ratio}}\\ =\frac{\$80,000+\$90,000}{40\%}\\ =\$425,000\end{array}$

The share of sales of Thermos A will be $\$148,750\left(\$425,000\times 35\%\right)$.

The share of sales of Thermos B will be $\$191,750\left(\$425,000\times 45\%\right)$.

The share of sales of Thermos C will be $\$85,000\left(\$425,000\times 20\%\right)$.