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16 June, 05:37

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

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  1. 16 June, 05:53
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    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
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