CVP analysis at a multiproduct firm Learning Objectives 4 5

CVP analysis at a multiproduct firm (Learning Objectives 4 &5) The contribution margin income statement of Morgantown Coffee for October follows P7-66A Morgantown Coffee Contribution Margin Income Statement Month Ended October 31 4 5 6 Sales revenue Less variable expenses: 95,000 Cost of goods sold Marketing expense General and administrative expense 33,500 12,000 2,000 47,500 5 47,500 10 Contribution margin 11 Less fixed expenses: 12 13 14 Operating income 15 Marketing expense General and administrative expense $ 19,125 3,375 22,500 5 25,000 Morgantown Coffee sells three small coffees for every large coffee. A small coffee sells for $2.00, with a variable expense of $1.00. A large coffee sells for $4.00, with a variable expense of $2.00.

Solution

1. firts we need to convert the sales into small cups and large cups therefore

small cups =95000*0.75=$71250 is the sales from small cups

Large cups =95000*0.25=$23750 is the sales from large cups

for the calculation of break even point we assume all the sales are in small cups therefore

contribution=sales-variable cost

=$2-$1

contribution = $1

Break even = Fixed cost/ Contribution per unit

=22500/1

=22500 small cups will be required for reaching the break even point

now we need to distribute the small cups in to there ratio

Large cups will be

=(22500*0.25)/2

=2813 cups willl be required therefore for the break even small and large cup required will be

small cups = 16875 cups

Large Cups = 2813 cups

Income Statement at break even sales will be as follows

Sales revenue $45000

(16875*2)+(2812.5*4)

Variable cost -$22500

(16875*1)+(2813*2)

Contribution $22500

Fixed Cost -$22500

Operation Profit/Loss 0

2. Compute margin of safety in dollars

Margin fo safety in dollars= actual sales- Break even point

=95000-45000

Margin of safety (in dollars)=$50000

3. First we need to calculate the oprating leverage for the month od oct

operating leverage=(sales-variable cost)/profit

=(95000-47500)/25000

operating leverage =1.9

operating leverage factor=%change in EBIT/%change in sales

1.9=%change in EBIT/ 13%

1.9*13=Change in EBIT

Change in EBIT=24.7

therefore if there is 13 % increase in the sales there will be 24.7% increase in the operating income