Question

Basic Cost-Volume-Profit Concepts Klamath Company produces a single product. The projected income statement for the coming year is as follows: $2,026,200 Sales (61,400 units @ $33.00) Total variable cost 1,337,292 Contribution margin $ 688,908 Total fixed cost 743,886 Operating income $(54,978) Required: 1. Compute the unit contribution margin and the units that must be sold to break even. Unit contribution margin Break-even units units 2. Suppose 10,000 units are sold above breakeven. What is the operating income? 3. Compute the contribution margin ratio. Use the contribution margin ratio to compute the break-even point in sales revenue. Contribution margin ratio Break-even sales revenue Suppose that revenues are $200,000 more than expected for the coming year. What would the total operating income be?

Answer 1

Answer:

1. Unit contribution margin = Contribution margin / No of units sold = $688908 / 61400 = $ 11.22

Break even units = total fixed costs/unit contribution margin = $743886/$11.22 = 66,300 units

2. Operating income if 10,000 units are sold above break even = No. of units above Break even * Contribution unit margin

= 10,000 * $11.22

= $112,200

3. Contribution margin ratio = (Contribution Margin/Sales)*100 = ($688908/$2026200)*100 = 34%

Break even Sales revenue = total fixed costs/contribution margin ratio = $743886/0.34 = $2,187,900

Suppose that revenues are $200,000 more than expected for the coming year, the total sales revenue would be $2,226,200

The total operating income would be = (Total revenue * Contribution margin ratio)-Fixed costs

= ($2,226,200*0.34)-$744,886

= $ 12,022

Thank you.