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	$	650,000		$	350,000		$	1,000,000
CM ratio		67	%		71	%		?

Fixed expenses total $586,000 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 $42,000 a month, by how much would you expect the monthly net operating income to increase?

Answer 1

1.

	In $
Sales	1,000,000
less: variable cost of goods sold	316,000
Gross contribution margin	684,000
less: fixed expenses	586,000
Net operating income	98,000

Gross contribution margin = 67% of 650,000 + 71% of 350,000 = $684,000. Variable costs of goods sold = 1,000,000-684,000 = $316,000

2. CM ratio of the company = 684,000/1,000,000 = 68.40%. Thus break even point in dollar sales = total fixed costs/CM ratio = 586,000/68.4%

= $856,725.1462 (or $856,725.15 rounded off)

3. Original sales level = $1,000,000. New sales level = $1,000,000+42,000 = $1,042,000

Sales	1,042,000
less: variable cost of goods sold	329,272
Gross contribution margin	712,728
less: fixed expenses	586,000
Net operating income	126,728

Thus increase in revenue = 126,728 - 98,000 (as computed in 1)

= $ 28,728

(Note 28728 = 42,000*68.4%)