Question

Contribution Margin Concepts
DiPinto Electric Guitars & Basses sells musical instruments in Philadelphia. Assume the following information comes from the company's prior year records.

		Fixed	Variable	Total
Sales				$800,000
Costs
Goods sold			$346,000
Labor		$180,000	40,000
Supplies		10,000	4,000
Utilities		9,000	5,000
Rent		48,000	-
Advertising		10,000	-
Miscellaneous		10,000	5,000
Total costs		$267,000	$400,000	(667,000)
Net income				$133,000

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

(c.) What is the annual break-even dollar sales volume if management makes a decision that increases fixed costs by $50,000?

$Answer

Answer 1

(a)

Contribution margin ratio = (Sales - Variable costs) / Sales

= ($800,000 - $400,000) / $800,000

= $400,000 / $800,000

= 50%

Break even dollar sales volume = Fixed costs / Contribution margin ratio

= $267,000 / 50%

= $534,000

(b)

Margin in safety in dollars = Current sales - Break even sales

= $800,000 - $534,000

= $266,000

(c)

Break even sales in dollars = Revised fixed costs / Contribution margin ratio

= ($267,000 + $50,000) / 50%

= $317,000 / 50%

= $634,000