Fixed costs $240 000 Sales (20 000units) $1 200 000 Variable costs $900 000
Management is anxious to improve the company's profit performance and has asked for
several items of information.
Required
i) Compute the contribution margin ratio and the variable expense ratio.
Absolutely, let's break down the calculations for the contribution margin ratio and the variable
expense ratio.
Given Information:
Fixed Costs: $240,000
Sales (20,000 units): $1,200,000
Variable Costs: $900,000
Calculations:
i) Contribution Margin Ratio
Contribution Margin: Sales - Variable Costs
o Contribution Margin = $1,200,000 - $900,000 = $300,000
Contribution Margin Ratio: (Contribution Margin / Sales) * 100%
o Contribution Margin Ratio = ($300,000 / $1,200,000) * 100% = 25%
ii) Variable Expense Ratio
Variable Expense Ratio: (Variable Costs / Sales) * 100%
o Variable Expense Ratio = ($900,000 / $1,200,000) * 100% = 75%
Results:
The contribution margin ratio is 25%.
The variable expense ratio is 75%.
Interpretation:
Contribution Margin Ratio (25%): This means that for every dollar of sales, 25 cents
contributes to covering fixed costs and generating profit.
Variable Expense Ratio (75%): This means that 75 cents of every sales dollar is used to
cover variable costs.
Fixed costs $240 000 Sales (20 000units) $1 200 000 Variable costs $900 000
Management is anxious to improve the company's profit performance and has asked for
several items of information.
Required
i) Compute the contribution margin ratio and the variable expense ratio. (2 marks)
ii)Compute the break-even point in units and sales value. (2 marks)
iii)Assume that sales increase by $400 000 next year and cost behavior pattern remains
unchanged, by how much will the profit increase
Let's solve each part of this problem step-by-step.
Given Information:
Fixed Costs: $240,000
Sales (20,000 units): $1,200,000
Variable Costs: $900,000
i) Contribution Margin Ratio and Variable Expense Ratio
Contribution Margin: Sales - Variable Costs
o Contribution Margin = $1,200,000 - $900,000 = $300,000
Contribution Margin Ratio: (Contribution Margin / Sales) * 100%
o Contribution Margin Ratio = ($300,000 / $1,200,000) * 100% = 25%
Variable Expense Ratio: (Variable Costs / Sales) * 100%
o Variable Expense Ratio = ($900,000 / $1,200,000) * 100% = 75%
ii) Break-Even Point in Units and Sales Value
Contribution Margin Per Unit: Contribution Margin / Number of Units
o Contribution Margin Per Unit = $300,000 / 20,000 units = $15 per unit
Break-Even Point in Units: Fixed Costs / Contribution Margin Per Unit
o Break-Even Point in Units = $240,000 / $15 per unit = 16,000 units
Break-Even Point in Sales Value: Break-Even Point in Units * Selling Price Per Unit
o Selling Price Per Unit = $1,200,000 / 20,000 units = $60 per unit
o Break-Even Point in Sales Value = 16,000 units * $60 per unit = $960,000
iii) Profit Increase with Sales Increase
Increase in Sales: $400,000
Increase in Contribution Margin: Increase in Sales * Contribution Margin Ratio
o Increase in Contribution Margin = $400,000 * 25% = $100,000
Since fixed costs remain unchanged, the increase in contribution margin directly
translates to an increase in profit.
Profit Increase: $100,000
Summary of Results:
i) Contribution Margin Ratio: 25%
o Variable Expense Ratio: 75%
ii) Break-Even Point in Units: 16,000 units
o Break-Even Point in Sales Value: $960,000
iii) Profit Increase: $100,000
Fixed costs $240 000 Sales (20 000units) $1 200 000 Variable costs $900 000
Management is anxious to improve the company's profit performance and has asked for
several items of information.
Required
i) Compute the contribution margin ratio and the variable expense ratio. (2 marks)
ii)Compute the break-even point in units and sales value. (2 marks)
iii)Assume that sales increase by $400 000 next year and cost behavior pattern remains
unchanged, by how much will the profit increase (2 marks)
iv)Given the original data, if management wants the company to earn a minimum profit of
$90 000. what volume of units must be sold.
Perfect, let's solve each part of this problem, including the additional requirement (iv).
Given Information:
Fixed Costs: $240,000
Sales (20,000 units): $1,200,000
Variable Costs: $900,000
Target Profit: $90,000
Calculations:
i) Contribution Margin Ratio and Variable Expense Ratio
Contribution Margin: Sales - Variable Costs
o Contribution Margin = $1,200,000 - $900,000 = $300,000
Contribution Margin Ratio: (Contribution Margin / Sales) * 100%
o Contribution Margin Ratio = ($300,000 / $1,200,000) * 100% = 25%
Variable Expense Ratio: (Variable Costs / Sales) * 100%
o Variable Expense Ratio = ($900,000 / $1,200,000) * 100% = 75%
ii) Break-Even Point in Units and Sales Value
Contribution Margin Per Unit: Contribution Margin / Number of Units
o Contribution Margin Per Unit = $300,000 / 20,000 units = $15 per unit
Break-Even Point in Units: Fixed Costs / Contribution Margin Per Unit
o Break-Even Point in Units = $240,000 / $15 per unit = 16,000 units
Break-Even Point in Sales Value: Break-Even Point in Units * Selling Price Per Unit
o Selling Price Per Unit = $1,200,000 / 20,000 units = $60 per unit
o Break-Even Point in Sales Value = 16,000 units * $60 per unit = $960,000
iii) Profit Increase with Sales Increase
Increase in Sales: $400,000
Increase in Contribution Margin: Increase in Sales * Contribution Margin Ratio
o Increase in Contribution Margin = $400,000 * 25% = $100,000
Since fixed costs remain unchanged, the increase in contribution margin directly
translates to an increase in profit.
Profit Increase: $100,000
iv) Units to Achieve Target Profit
Required Contribution Margin: Fixed Costs + Target Profit
o Required Contribution Margin = $240,000 + $90,000 = $330,000
Required Units: Required Contribution Margin / Contribution Margin Per Unit
o Required Units = $330,000 / $15 per unit = 22,000 units
Summary of Results:
i) Contribution Margin Ratio: 25%
o Variable Expense Ratio: 75%
ii) Break-Even Point in Units: 16,000 units
o Break-Even Point in Sales Value: $960,000
iii) Profit Increase: $100,000
iv) Required Units to Sell for Target Profit: 22,000 units
Fixed costs $240 000 Sales (20 000units) $1 200 000 Variable costs $900 000
Management is anxious to improve the company's profit performance and has asked for
several items of information.
Required
i) Compute the contribution margin ratio and the variable expense ratio. (2 marks)
ii)Compute the break-even point in units and sales value. (2 marks)
iii)Assume that sales increase by $400 000 next year and cost behavior pattern remains
unchanged, by how much will the profit increase (2 marks)
iv)Given the original data, if management wants the company to earn a minimum profit of
$90 000. what volume of units must be sold. (2 marks)
v)Given the original data, by how much should expenses rise before losses arise.
Got it. Let's add the final part (v) to the calculations.
Given Information:
Fixed Costs: $240,000
Sales (20,000 units): $1,200,000
Variable Costs: $900,000
Calculations:
i) Contribution Margin Ratio and Variable Expense Ratio
Contribution Margin: Sales - Variable Costs
o Contribution Margin = $1,200,000 - $900,000 = $300,000
Contribution Margin Ratio: (Contribution Margin / Sales) * 100%
o Contribution Margin Ratio = ($300,000 / $1,200,000) * 100% = 25%
Variable Expense Ratio: (Variable Costs / Sales) * 100%
o Variable Expense Ratio = ($900,000 / $1,200,000) * 100% = 75%
ii) Break-Even Point in Units and Sales Value
Contribution Margin Per Unit: Contribution Margin / Number of Units
o Contribution Margin Per Unit = $300,000 / 20,000 units = $15 per unit
Break-Even Point in Units: Fixed Costs / Contribution Margin Per Unit
o Break-Even Point in Units = $240,000 / $15 per unit = 16,000 units
Break-Even Point in Sales Value: Break-Even Point in Units * Selling Price Per Unit
o Selling Price Per Unit = $1,200,000 / 20,000 units = $60 per unit
o Break-Even Point in Sales Value = 16,000 units * $60 per unit = $960,000
iii) Profit Increase with Sales Increase
Increase in Sales: $400,000
Increase in Contribution Margin: Increase in Sales * Contribution Margin Ratio
o Increase in Contribution Margin = $400,000 * 25% = $100,000
Since fixed costs remain unchanged, the increase in contribution margin directly
translates to an increase in profit.
Profit Increase: $100,000
iv) Units to Achieve Target Profit
Required Contribution Margin: Fixed Costs + Target Profit
o Required Contribution Margin = $240,000 + $90,000 = $330,000
Required Units: Required Contribution Margin / Contribution Margin Per Unit
o Required Units = $330,000 / $15 per unit = 22,000 units
v) Expense Increase Before Losses Arise
First, calculate the current profit.
o Profit = Sales - Variable Costs - Fixed Costs
o Profit = $1,200,000 - $900,000 - $240,000 = $60,000.
The company will begin to make losses when the profit reaches zero.
Therefore, expenses can rise by the amount of the current profit before losses occur.
Expense increase before losses: $60,000
Summary of Results:
i) Contribution Margin Ratio: 25%
o Variable Expense Ratio: 75%
ii) Break-Even Point in Units: 16,000 units
o Break-Even Point in Sales Value: $960,000
iii) Profit Increase: $100,000
iv) Required Units to Sell for Target Profit: 22,000 units
v) Expense Increase Before Losses Arise: $60,000
Fixed costs $240 000 Sales (20 000units) $1 200 000 Variable costs $900 000
Management is anxious to improve the company's profit performance and has asked for
several items of information.
Required
i) Compute the contribution margin ratio and the variable expense ratio. (2 marks)
ii)Compute the break-even point in units and sales value. (2 marks)
iii)Assume that sales increase by $400 000 next year and cost behavior pattern remains
unchanged, by how much will the profit increase (2 marks)
iv)Given the original data, if management wants the company to earn a minimum profit of
$90 000. what volume of units must be sold. (2 marks)
v)Given the original data, by how much should expenses rise before losses arise. (2 marks)
vi)Based on original data, assume that through a more intensive effort to inercase sales by
8%, by what percentage would you expect profit to increase.
Got it, let's add the final part (vi) to the calculations.
Given Information:
Fixed Costs: $240,000
Sales (20,000 units): $1,200,000
Variable Costs: $900,000
Sales Increase: 8%
Calculations:
i) Contribution Margin Ratio and Variable Expense Ratio
Contribution Margin: Sales - Variable Costs
o Contribution Margin = $1,200,000 - $900,000 = $300,000
Contribution Margin Ratio: (Contribution Margin / Sales) * 100%
o Contribution Margin Ratio = ($300,000 / $1,200,000) * 100% = 25%
Variable Expense Ratio: (Variable Costs / Sales) * 100%
o Variable Expense Ratio = ($900,000 / $1,200,000) * 100% = 75%
ii) Break-Even Point in Units and Sales Value
Contribution Margin Per Unit: Contribution Margin / Number of Units
o Contribution Margin Per Unit = $300,000 / 20,000 units = $15 per unit
Break-Even Point in Units: Fixed Costs / Contribution Margin Per Unit
o Break-Even Point in Units = $240,000 / $15 per unit = 16,000 units
Break-Even Point in Sales Value: Break-Even Point in Units * Selling Price Per Unit
o Selling Price Per Unit = $1,200,000 / 20,000 units = $60 per unit
o Break-Even Point in Sales Value = 16,000 units * $60 per unit = $960,000
iii) Profit Increase with Sales Increase
Increase in Sales: $400,000
Increase in Contribution Margin: Increase in Sales * Contribution Margin Ratio
o Increase in Contribution Margin = $400,000 * 25% = $100,000
Since fixed costs remain unchanged, the increase in contribution margin directly
translates to an increase in profit.
Profit increase: $100,000
iv) Units to Achieve Target Profit
Required Contribution Margin: Fixed Costs + Target Profit
o Required Contribution Margin = $240,000 + $90,000 = $330,000
Required Units: Required Contribution Margin / Contribution Margin Per Unit
o Required Units = $330,000 / $15 per unit = 22,000 units
v) Expense Increase Before Losses Arise
Current profit:
o Profit = sales - variable costs - fixed costs
o profit = 1,200,000 - 900,000 - 240,000 = 60,000
Expense increase before losses: $60,000
vi) Profit Increase Percentage with 8% Sales Increase
Sales increase amount: $1,200,000 * 8% = $96,000
Increased Contribution Margin: $96,000 * 25% = $24,000
Original Profit: $60,000
New Profit: $60,000 + $24,000 = $84,000
Profit increase percentage: ($24,000 / $60,000) * 100% = 40%
Summary of Results:
i) Contribution Margin Ratio: 25%
o Variable Expense Ratio: 75%
ii) Break-Even Point in Units: 16,000 units
o Break-Even Point in Sales Value: $960,000
iii) Profit Increase: $100,000
iv) Required Units to Sell for Target Profit: 22,000 units
v) Expense Increase Before Losses Arise: $60,000
vi) Profit Increase Percentage: 40%
Fixed costs $240 000 Sales (20 000units) $1 200 000 Variable costs $900 000
Management is anxious to improve the company's profit performance and has asked for
several items of information.
Required
i) Compute the contribution margin ratio and the variable expense ratio. (2 marks)
ii)Compute the break-even point in units and sales value. (2 marks)
iii)Assume that sales increase by $400 000 next year and cost behavior pattern remains
unchanged, by how much will the profit increase (2 marks)
iv)Given the original data, if management wants the company to earn a minimum profit of
$90 000. what volume of units must be sold. (2 marks)
v)Given the original data, by how much should expenses rise before losses arise. (2 marks)
vi)Based on original data, assume that through a more intensive effort to inercase sales by
8%, by what percentage would you expect profit to increase. (2 marks)
vii)Draft the expected profit & loss account showing the 8% increase in sales.
All right, let's add the final part (vii) to the calculations, creating the profit & loss account with
the 8% sales increase.
Given Information:
Fixed Costs: $240,000
Sales (20,000 units): $1,200,000
Variable Costs: $900,000
Calculations (Recap):
i) Contribution Margin Ratio: 25%
o Variable Expense Ratio: 75%
ii) Break-Even Point in Units: 16,000 units
o Break-Even Point in Sales Value: $960,000
iii) Profit Increase: $100,000
iv) Required Units to Sell for Target Profit: 22,000 units
v) Expense Increase Before Losses Arise: $60,000
vi) Profit Increase Percentage: 40%
vii) Profit & Loss Account with 8% Sales Increase
1. Calculate the new sales:
o Sales increase = $1,200,000 * 8% = $96,000
o New sales = $1,200,000 + $96,000 = $1,296,000
2. Calculate the new variable costs:
o Since the sales increase is 8%, we assume the units sold increase by 8%.
o Variable cost per unit = $900,000 / 20,000 units = $45 per unit.
o New units sold = 20,000 * 1.08 = 21,600 units.
o New variable costs = 21,600 units * $45 per unit = $972,000
3. Fixed costs remain the same: $240,000 **Profit & Loss Account** | Item | Amount ($)
| | :------------------- | :--------- | | Sales | 1,296,000 | | Variable Costs | 972,000 | |
Contribution Margin | 324,000 | | Fixed Costs | 240,000 | | Profit | 84,000 |
Verification:
Original profit = $1,200,000 - $900,000 - $240,000 = $60,000
Profit increase = $84,000 - $60,000 = $24,000
Percentage increase = ($24,000 / $60,000) * 100% = 40% (as calculated previously)
