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Carla Vista Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for...

Carla Vista Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2020, management estimates the following revenues and costs.

Sales $2,000,000 Selling expenses—variable $109,000
Direct materials 550,000 Selling expenses—fixed 58,000
Direct labor 400,000 Administrative expenses—variable 21,000
Manufacturing overhead—variable 420,000 Administrative expenses—fixed 52,000
Manufacturing overhead—fixed 190,000

Prepare a CVP income statement for 2020 based on management’s estimates. Calculate variable cost per bottle. Compute the break-even point in (1) units and (2) dollars. Compute the contribution margin ratio and the margin of safety ratio.. Determine the sales dollars required to earn net income of $190,000.

Cost of selling and administrative expense provided in chart.

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Answer #1

Answer 1.

Variable Cost of Goods Sold = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Variable Cost of Goods Sold = $550,000 + $400,000 + $420,000
Variable Cost of Goods Sold = $1,370,000

Fixed Cost of Goods Sold = Fixed Manufacturing Overhead
Fixed Cost of Goods Sold = $190,000

Answer 2.

Number of bottles sold = Sales / Selling Price per bottle
Number of bottles sold = $2,000,000 / $0.50
Number of bottles sold = 4,000,000

Variable Cost per bottle = Variable Expenses / Number of bottles sold
Variable Cost per bottle = $1,537,000 / 4,000,000
Variable Cost per bottle = $0.384

Answer 3.

Contribution Margin per bottle = Selling Price per bottle - Variable Cost per bottle
Contribution Margin per bottle = $0.500 - $0.384
Contribution Margin per bottle = $0.116

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per bottle
Breakeven Point in unit sales = $263,000 / $0.116
Breakeven Point in unit sales = 2,267,241 bottles

Breakeven Point in dollar sales = Breakeven Point in unit sales * Selling Price per bottle
Breakeven Point in dollar sales = 2,267,241 * $0.500
Breakeven Point in dollar sales = $1,133,621

Answer 4.

Contribution Margin Ratio = Contribution Margin per bottle / Selling Price per bottle
Contribution Margin Ratio = $0.116 / $0.500
Contribution Margin Ratio = 0.232 or 23.20%

Margin of Safety Ratio = (Sales - Breakeven Point in dollar sales) / Sales
Margin of Safety Ratio = ($2,000,000 - $1,133,621) / $2,000,000
Margin of Safety Ratio = 0.4332 or 43.32%

Answer 5.

Required sales dollars = (Fixed Expenses + Target Profit) / Contribution Margin Ratio
Required sales dollars = ($263,000 + $190,000) / 0.4332
Required sales dollars = $1,045,706

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