Question

Olongapo Sports Corporation distributes two premium golf balls—Flight Dynamic and Sure Shot. Monthly sales and the contribution margin ratios for the two products follow: Product Flight Dynamic Sure Shot Total Sales $ 720,000 $ 280,000 $ 1,000,000 CM ratio 68 % 73 % ? Fixed expenses total $573,500 per month. Required: 1. Prepare a contribution format income statement for the company as a whole. 2. What is the company's break-even point in dollar sales based on the current sales mix? 3. If sales increase by $59,000 a month, by how much would you expect the monthly net operating income to increase?

Answer 1

Answer 1:

Flight Dynamic

Total Sales = $ 720,000

CM ratio = 68%

Variable cost ratio = 1 - 68% = 32%

Variable cost = $720,000 * 32% = $230,400

Sure Shot

Total Sales = $280,000

CM ratio = 73%

Variable cost ratio = 1 - 73% = 27%

Variable cost = $280,000 * 27% = $75,600

Answer 2:

Company's contribution ratio = Total contribution / Total sales = $694,000 / $1,000,000 = 69.4%

Company's break-even point in dollar sales based on the current sales mix = Fixed Expense / Company's contribution ratio

= $573,500 / 69.4%

= 826368.88

Company's break-even point in dollar sales = $826,368.88

Answer 3:

Assuming sales mix remaining constant:

Increase in monthly net operating income if Sales increase by $59,000 a month = Increase in sales * Company's contribution ratio

= $59,000 * 69.4%

= $40,946

Expected increase in monthly net operating income if Sales increase by $59,000 a month = $40,946