P52A Prepare a CVP income statement compute breakeven point

P5-2A Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio and sales for target net income Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2017, management estimates the following revenues and costs. Sales $1,800,000 Selling expenses - variable $70,000 Direct materials 430,000 Selling expenses - fixed 65,000 Direct labor 360,000 Administrative expenses - variable 20,000 Manufacturing overhead- variable 380,000 Administrative expenses - fixed 60,000 Manufacturing overhead -fixed 280,000

Instructions

(a) Prepare a CVP income statement for 2017 based on management estimates. (show column for total amounts only.)

(b) Compute the break-even point in (1) units and (2) dollars.

(c ) Compute the contribution margin ratio and the margin of safety ratio. (Round to the nearest full percent.) (d) Determine the sales dollars required to earn net income of $180,000.

Solution

a. Sales        18,00,000 Variable expenses: cost of good sold (430000+360000+380000)                                           11,70,000 selling expenses                                                 70,000 Admin exp                                                 20,000 Total variable expense        12,60,000 Contribution margin          5,40,000 Fixed Expense: Cost of good sold                                              2,80,000 selling expenses                                                 65,000 Admin exp                                                 60,000 Total fixed expense          4,05,000 Net Income          1,35,000 b. Break even in units Unit selling price 0.5 Unit variable cost 0.35 70% of sales unit contribution margin 0.15 Fixed cost 405000 Break even in units Fixed cost/contribution per unit 405000/0.15                                           27,00,000 Variable cost in % (variable cost/sales) 1260000/1800000 70% Break even in dollars Break even in units                                           27,00,000 Units selling price 0.5 Break even in dollars                                           13,50,000 (BEP in units*units sellin price) c. Contribution margin ratio Unit contribution margin $0.15 Unit selling price $0.50 Contribution margin ratio Contribution/sales 30% Margin of safety ratio Margin of safety sales Total sales-break even sales 1800000-1350000 450000 Margin of safety ratio Margin of safety sales/total sales 450000/1800000 25% d. sales required for net income of 180000 Net income                                              1,80,000 Fixed cost from above                                              4,05,000 Contribution                                              5,85,000 30% calculated in point c Variable cost (585000/0.30*0.70)                                           13,65,000 70% of sales calculated in point b Total sales                                           19,50,000 100% sales required for net income of 180,000 is $19,50,000