Question

Contribution Margin Concepts
The following information is taken from the 2017 records of Hendrix's Guitar Center.

		Fixed	Variable	Total
Sales				$1,125,000
Costs
Goods sold			506,250
Labor		$240,000	90,000
Supplies		3,000	7,500
Utilities		18,000	19,500
Rent		36,000	0
Advertising		9,000	36,750
Miscellaneous		9,000	15,000
Total costs		$315,000	$675,000	(990,000)
Net income				$ 135,000

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 $40,000?

$Answer

Answer 1

(a)

Contribution margin ratio = (Contribution margin / sales revenue) x 100

Contribution margin = Sales - Variable cost = $1125000 - $675000 = $450000

Contribution margin ratio = ($450000 / $1125000) x 100 = 40%

Break even Dollars sales volume = Fixed cost / Contribution margin ratio

= $315000 / 40%

= $787500.

(b)

Margin of Safety in Dolllars = Net income / Contribution margin ratio

= $135000 / 40%

= $337500

(d)

Break even Dollars sales volume = Fixed cost / Contribution margin ratio

= ($315000 + $40000) / 40%

= $355000 / 40%

= $887500