Question

Cover-to-Cover Company

Contribution Margin Income Statement

For the Year Ended December 31, 20Y7

1	Sales			$424,000.00
2	Variable costs:
3	Manufacturing expense		$233,200.00
4	Selling expense		21,200.00
5	Administrative expense		63,600.00	318,000.00
6	Contribution margin			$106,000.00
7	Fixed Costs:
8	Manufacturing expense		$5,000.00
9	Selling expense		4,000.00
10	Administrative expense		33,400.00	42,400.00
11	Income from operations			$63,600.00

Income Statement - Biblio Files

Biblio Files Company

Contribution Margin Income Statement

For the Year Ended December 31, 20Y7

1	Sales			$424,000.00
2	Variable costs:
3	Manufacturing expense		$169,600.00
4	Selling expense		16,960.00
5	Administrative expense		67,840.00	254,400.00
6	Contribution margin			$169,600.00
7	Fixed Costs:
8	Manufacturing expense		$88,000.00
9	Selling expense		8,000.00
10	Administrative expense		10,000.00	106,000.00
11	Income from operations			$63,600.00

Sales Mix

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Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

Type of Bookshelf	Sales Price per Unit	Variable Cost per Unit
Basic	$5.00	$1.75
Deluxe	9.00	8.10

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $346,962. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
Basic
Deluxe

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Check My Work

Review the definition of break-even point.

Recall that the Combined unit contribution margin is given by [(Basic unit contribution margin) x (Basic percent of sales mix)] + [(Deluxe unit contribution margin) x (Deluxe percent of sales mix)]. Since these percents must add up to 100%, we have the following:

(Basic percent of sales mix) + (Deluxe percent of sales mix) = 100%, so that

(Deluxe percent of sales mix) = 100% - (Basic percent of sales mix)

Target Profit

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Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement panels. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?

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Examine the differences between the two companies, including the differences in elements of the target profit formula.

2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?

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Examine the differences between the two companies, including the differences in elements of the target profit formula.

3. What would explain the difference between your answers for (1) and (2)?

Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide income from operations.

The companies have goals that are not in the relevant range.

The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.

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Examine the differences between the two companies, including the differences in elements of the target profit formula.

Answer 1

Part A - Sales Mix

Combined Contribution = $2.31 per unit

Fixed Cost = $346962

Combined Break even Point = ($346962/$2.31) = 150200 units

Break Even Basic Units = 'x'

Break Even Deluxe Units = 'Y'

X + Y = 150200 units

Contribution Margin Basic Product = ($5 - $1.75) = $3.25

Cobtribution Margin Deluxe Product = ($9 - $8.1) = $0.9

at Break Even, Contribution is equal to fixed cost

Contribution = Fixed cost

(x*$3.25) + (y*$0.9) = $346962

$3.25x + (150200 - x)*$0.9 = $346962

$3.25x + 135180 - $0.9x = $346962

$2.35x = $211782

x = 90120 units (Break Even Basic)

y = (150200 - 90120) = 60080 units (Break Even Deluxe)

Percentage of Sales Mix -

Basic = 90120/150200*100 = 60%

Deluxe = 60080/150200*100 = 40%

Break Even point in dollars-

Break even point in dollars = Break unit Units*Sales Price

Basic Break even point in dollars = 90120*$5 = $450600

Deluxe Break even point in dollars = 60080*$9 = $540720

Part B - Working

Estimated Sales = (Profit + Fixed cost)/Contribution Margin

Part 1 - Cover to Cover company

Profit = ($30000+$63600) = $93600

Contribution Margin = ($106000/$424000)*100 = 25%

Fixed Cost = $42400

Expected Sales = ($93600*$42400)/25% = $544000

Part 2 - Biblio Files Company

Profit = ($63600+$30000) = $93600

Contribution Margin = ($169600/$424000)*100 = 40%

Fixed cost = $106000

Expected Sales = ($106000+$93600)/40% = $499000

Part 3 - There is difference in answer of Part 1 and Part 2. Looking at the answers, Biblio files company is in better position

Answers are different because, Biblio files company has higher contribution margin ratio so more of each sales dollar is available to cover fixed cost and provide income from operations