Question

Contribution Margin Concepts The following information is taken from the 2017 records of Hendrix's Guitar Center. Fixed Variable Total Sales $2,250,000 Costs Goods sold 1,012,500 Labor $480,000 180,000 Supplies 6,000 15,000 Utilities 36,000 39,000 Rent 72,000 0 Advertising 18,000 73,500 Miscellaneous 18,000 30,000 Total costs $630,000 $1,350,000 (1,980,000) Net income $ 270,000 Required (a.) Determine the annual break-even dollar sales volume. Contribution margin ratio: Answer Annual break-even dollar sales volumes: $Answer (b.) Determine the current margin of safety in dollars. $Answer (d.) What is the annual break-even dollar sales volume if management makes a decision that increases fixed costs by $100,000? $Answer

Answer 1

Answer and Explanation:

a. The computation of the contribution margin ratio and annual break even dollar sales volume is shown below:

Total sales $2,250,000

Less: Variable cost:

Goods sold -$1,012,500

Labor -$180,000

Supplies -$15,000

Utilities -$39,000

Advertising -$73,500

Miscelloneous -$30,000

Total variable cost ($1,350,000)

So, Contribution margin ratio $900,000

Now

Contribution margin ratio is

= contribution margin ÷ sales

= $900,000 ÷ $2,250,000

= 40%

And,

Annual breakeven dollars in sales volume is

= Fixed cost ÷ contribution margin ratio

= $630,000 ÷ 40%

= $1,575,000

b. Now the margin of safety in dollars is

= Current sales level - Break even sales level

= $2,250,000 - $1,575,000

= $675,000

d. Now the annual break even in dollars is

= Total fixed cost ÷ contribution margin

= ($630,000 + $100,000) ÷ 40%

= $730,000 ÷ 40%

= $1,825,000

We simply applied the above formulas