Question

Use the information from the following Income Statement to create and Projected Income Statement and solve the questions at bottom of the page. Complete the Income State to reflect the expected sales increase, then also complete the grey cells at the bottom of the page. Complete the other two spreadsheets in this workbook and after doing all the calculations discuss the impact of variable versus fixed expenses. Include in your conclusion which company you think is in the better financial situation and why. Use 3-4 paragraphs for your total discussion.
		Income Statement				Projected Income Statement
Sales Revenue					$2,500,000
Variable Costs
	Purchases		$750,000	0.3
	Direct labor		$600,000	0.24	$1,350,000
					$1,150,000
Fixed Costs
	Selling		$500,000
	Administrative		$485,000
	Manufacturing Overhead		$150,000		$1,135,000
Profit
			Dollars	Percentage
Calculate the Contribution Margin
Calculate the Gross Margin Ratio
Calculate Breakeven Sales
Calculate Margin of Safety based on the 5% expected sales increase.

Answer 1

Total Cost	Per Unit Cost	No. of Units Sold
(A)	(B)	C= A/B
7,50,000	0.30	25,00,000
6,00,000	0.24	25,00,000

	Per Unit ($)	Total ($)
Sales	1.00	25,00,000
Variable Cost:
Purchases	0.30	7,50,000
Direct Labour	0.24	6,00,000
Contribution Margin	0.46	11,50,000
Contribution Margin (%)	46.00%	46.00%
Fixed Mgf. Overhead	0.06	1,50,000
Gross Margin\	0.40	10,00,000
Gross Margin (%)	40.00%	40.00%

Breakeven Sales = Total Fixed Cost / Contribution Margin (%) = 11,35,000 / 46% = 24,67,391

Revised Sales = 2,500,000 * 1.05 = 2,625,000

Margin of Safety = Actual Sales - Breakeven Sales = 26,25,000 - 24,67,391 = 157,609

Margin of Safety (%)= (Actual Sales - Breakeven Sales)/Actual Sales = (26,25,000 - 24,67,391)/26,25,000 = 157,609/26,25,000 = 6%