The contribution margin income statement of Westlake Coffee

The contribution margin income statement of Westlake Coffee for October follows: ?(Click the icon to view the contribution margin income statement.) Westlake 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. Read the requirements. Requirement 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. Begin by identifying the formula to compute the total breakeven point in units Abbreviations used: avg. = Average; CM = Contribution margin. )f Breakeven sales in units = Now calculate the weighted-average contribution margin per unit. (Round the weighted-average contribution margin per unit to the nearest cent.) Small Large Total Less: margin per unit The breakeven point is [- ]small cups and [-]large cups of coffee. Prepare a summary contribution margin income statement to prove your answer above. (Complete all answer boxes. For amounts with a $0 balance make sure to enter \"0\" in the appropriate cell.) Small Large Total Less: Less: Operating income

Solution

Requirement 1 :

Monthly breakeven point in the number of small coffees and large coffees:

Formula for Breakeven Point in sales unit =

(Fixed Cost + Target Income ) / Weighted Avg CM per unit

Now, Calculation of Weighted Avg CM per unit:

Total CM per unit = $ 4.50 + $ 2.50 = $ 7.00

Weighted Avg CM Per unit = $ 7 / 4 = $ 1.75

Breakeven Sales = (Fixed cost + Target Income) / Weighted Avg CM per unit

= $ 42,000 / $ 1.75 = 24,000

Breakeven Sales in Small Coffees = 24,000 * 3/4 = 18,000

Breakeven Sales in Large Coffees = 24,000 * 1/4 = 6,000

Summary Contribution Margin Income Statement:

Requirement 2 : Coffee Shop\'s Margin Of Safety:

Formula : Actual Sales - Breakeven Point = Margin of Safety in dollars

Margin of Safety = $ 144,000 - ( $ 18000 * 3 + $ 6000 * 5)

= $ 144,000 - ( $ 54000 + $ 30000)

= $ 144000 - $ 84000

= $ 60000

Requirement 3 : Computation of Operating Leverage Factor

Formula : % Change in Net Operating Income / % Change in Sales = Operating Leverage Factor

Operating Leverage Factor = 26.40% / 11% = 2.40

Effects on Operating Income of 11 % Increase in Sales

New Operating Income after increase = $ 37,920

Increase in Operating Income = 26.40% i.e. $ 7920

Thank You

Particulars	Small Coffee ($)	Large Coffee ($)
Sales Price per unit	3.00	5.00
Less : Variable Cost per unit	1.50	2.50
Contribution Margin (CM)	1.50	2.50