Question

Spencer Company's most recent monthly contribution format income statement is given below:

           

	Sales..................................	$60,000
	Variable expenses.............	45,000
	Contribution margin..........	15,000
	Fixed expenses..................	18,000
	Net operating loss..............	($3,000)

            The company sells its only product for $10 per unit. There were no beginning or ending inventories.

           

            Required:

           

1. What are total sales in dollars at the break-even point?
2. What are total variable expenses at the break-even point?
3. What is the company's contribution margin ratio?

d.   If unit sales were increased by 10% and fixed expenses were reduced by

                 $2,000, what would be the company’s expected net operating income?

            (Prepare a new income statement)

Answer 1

Spencer Company
Units Sold	$60000/$10	6000
	Per Unit	Total
Sales	10	60000
Less: Variable Costs	7.5	45000
Contribution Margin	2.5	15000
Less: Fixed Expenses		18000
Operating (Loss)		-3000

c.

CM Ratio

= Contribution Margin / Selling Price

25%

a.

Break-Even units (Dollars)

=Fixed Cost / Contribution Margin

=18000/25%

72000

b.

Units Sold @ BEP= 72000/10	7200
Variable Cost @ BEP = 7200 * 7.5 =	54000

Income Statement @ SP = $11 ($10(1+10%)) and Fixed Cost @ 16000 (18000-2000)
Units Sold	6000
	Per Unit	Total
Sales	11	66000
Less: Variable Costs	7.5	45000
Contribution Margin	3.5	21000
Less: Fixed Expenses		16000
Operating Profit		5000