Expert Answers

1. Presented here is the income statement for Edwards Co. for February:

Sales                                          $83,500

Costs of goods sold                     41,500

Gross profit                                $42,000

Operating expenses                      31,500

Operating income                       $10,500

Based on analysis of cost behavior patterns, it has been determined that the company’s contribution margin ratio is 32%.

Requirement:

a. Rearrange the preceding income statement to the contribution margin format.

2. Body Sculpture, Inc., makes three models of high-performance weight-training benches. Current operating data are summarized here:

                                                           MegaMuscle  Power Gym  ProForce

Selling price per unit                              $   132              $198          $298

Contribution margin per unit                        41                   77             60

Monthly sales volume – units                  3,020              2,030        1,080

Fixed expenses per month                                     total of $

                                                                              314,000

Requirement:1

Calculate the contribution margin ratio of each product.

Requirement: 2

Calculate the firm’s overall contribution margin ratio

Requirement: 3

Calculate the firm’s monthly break-even point in sales dollars.

Requirement: 4

Calculate the firm’s monthly operating income (loss).

Requirement: 5

Management considering the elimination of the ProForce model due to its low sales volume the low contribution margin ratio. As a result total fixed expenses can be reduced to $258,930 per month. Assuming that this change would not effect the other models, What would be the effect on net operating income.

3. Riveria Co. makes and sells a single product. The current selling price is $31 per unit. Variable expenses are $18 per unit, and fixed expenses total $42,500 per month. Sales volume for May totaled 4,180 unit.

Requirement: 1

Calculate operating income (loss) for May.

Requirement:2

Calculate the break-even point in terms of units sold and total revenues.

Requirement: 3

Management is considering installing automated equipment to reduce direct labor cost. If this were done, variable expenses would drop to $15 per unit, but fixed expenses would increase to $67,100 per month.

a. Calculate operating income at a volume of 4,180 units per month with the new cost structure.

b. Calculate the break-even point in units with the new cost structure.

4. George Corp. has annual revenues of $259,000, an average contribution margin ratio of 33% and fixed expenses of $109,100.

Required:

a. Management is considering adding a new product to the company’s product line. The new item will have $9.1 of variable cost per unit. Calculate the selling price that will be required is this product is not to affect the average contribution margin ratio.

b. If the new product adds and additional $30,100 to George’s fixed expenses, how many units of the new product must be sold at the price calculate in requirement a to break-even on the new product?

c. If 21,500 units of the new product could be sold at a price of $13.7 per unit and the company other business did not change, calculate Meyers’s total operating income and average contribution margin ratio.