Chapter 7, Problem 7.72BP

CVP analysis at a multiproduct firm (Learning Objectives 4 & 5)

The contribution margin income statement of Liberty Coffee for July follows:

7.4-22 Full Alternative Text

Liberty Coffee sells three small coffees for every large coffee. A small coffee sells for $3.00, with a variable expense of $1.50. A large coffee sells for $5.00, with a variable expense of $2.50.

Requirements

1. 1. Determine the coffee shop’s monthly breakeven point in the numbers of small coffees and large coffees. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of expenses: variable and fixed.
2. 2. Compute the coffee shop’s margin of safety in dollars.
3. 3. Use the coffee shop’s operating leverage factor (using the July contribution margin income statement) to determine its new operating income if sales volume increases 12%. Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged.