Question

PA6-3 (Algo) Calculating Contribution Margin, Contribution Margin Ratio, Break-Even Point, Target Profit [LO 6-1, 6-2]Hawk Homes, Inc., makes one type of birdhouse that it sells for $30.00 each. Its variable cost is $14.50 per house, and its fixed costs total $13,268.00 per year. Hawk currently has the capacity to produce up to 2,700 birdhouses per year, so its relevant range is 0 to 2,700 houses.Required:1. Prepare a contribution margin income statement for Hawk assuming it sells 1,210 birdhouses this year.2. Without any calculations, determine Hawk’s total contribution margin if the company breaks even.3. Calculate Hawk’s contribution margin per unit and its contribution margin ratio.4. Calculate Hawk’s break-even point in number of units and in sales revenue.5. Suppose Hawk wants to earn $21,000 this year. Determine how many birdhouses it must sell to generate this amount of profit.

Answer 1

Step-by-step explanation:

1. The contribution margin income statement is shown below:

Sales (1,210 × $30) $36,300

Less: Variable cost (1,210 × $14.50) ($17,545)

Contribution margin $18,755

Less: Fixed cost ($13,268)

Net income $5,487

2. For break even, the total contribution margin = break even = $13,268

3. Contribution margin per unit = Selling price per unit - Variable expense per unit

= $30- $14.50

= $15.50

Contribution margin ratio = (Contribution margin per unit) ÷ (selling price per unit) × 100

= ($15.50) ÷ ($30) × 100 = 51.67%

4. Break even point in units = (Fixed expenses) ÷ (Contribution margin per unit)

= ($13,268) ÷ ($15.50)

= 856 units

Break even point in dollars = (Fixed expenses) ÷ (Contribution margin ratio)

= ($13,268) ÷ (51.67%)

= $25,678

5. = (Fixed expenses + target profit) ÷ (Contribution margin per unit)

= ($13,268+ $21,000) ÷ ($15.50)

= ($34,628) ÷ ($15.50)

= 2,210 birdhouses