Question

Gulf Shore Lawn and Garden Maintenance provides two general outdoor services: lawn maintenance and garden maintenance. The company charges customers $25.0 per hour for each type of service, but lawn maintenance has higher variable costs ($10.0 per hour) than garden maintenance ($5.0 per hour) because of fuel expenses incurred to operate lawn-mowing equipment. All employees are paid a fixed monthly salary. A contribution format income statement for a recent month for the two services appears below. During the month, 8,000 hours of lawn maintenance services and 2.000 hours of garden maintenance were provided: Sales Variable expenses Lawn Per Garden Per Maintenance Hour Maintenance Hour $ 200,000 $25.0 $50,000 $25.0 80,000 10.0 10,000 5.0 Total $ 250.000 90,000 Contribution margin $ 120,000 $15.0 $ 40,000 $20.0 160,000 56.000 Fixed expenses Operating income $ 104,000 Required: 1. Compute the overall CM ratio for the company. 2. Compute the overall break-even point for the company in sales dollars. < Prev 1 of 3 !!! Next >

Answer 1

Answer 1)

Overall CM Ratio = Total Contribution Margin/Total Sales

=160,000/250,000

64%

So, Overall CM Ratio is 64%

Answer 2)

Overall Break Even Point(in sales) = Total Fixed Expenses/Overall CM Ration

=56000/64%

Overall Break Even Point(in sales)= 87,500

Answer 3)
Product	Sales	Weight=individual sales/Total Sales	Contribution Margin per unit	WeightAverage =(weight*contribution margin)
Lawn	200,000	0.8	15	12
Garden	50,000	0.2	20	4
	250,000	1		16
Weighted average CM per hour = $16
Answer 4)
Breakeven point (in sales) as calculated above is 87,500
So, assume Breakeven hour for Lawn = x and garden = y
sales per hour for both product is 25 (given)
(25*x)+(25*y)=87,500
25(x+y) =87500
x+y =3500 hours
So, company needs 3500 hours of both lawn and garden to breakeven.

Answer 5)
We know that Contribution margin at Breakeven hours is equal to Fixed Cost,
(Contribution Margin = Fixed Cost) = Breakeven point
So above we find out that Lawn and Garden hours to Breakeven is 3,500 Hours.
Contribution Margin of lawn + Contribution Margin of Garden = $56,000
So let’s take breakeven Hours of Lawn = x
Breakeven Hours of Garden = y
(contribution margin per unit of Lawn * x)+(contribution margin per unit of Lawn * y)=56,000
(15*x)+ (20*y) =56,000
15x +20y =56000
as calculated above x=3500-y
(15 *(3500-y) +20y =56000
52500-15y+20y=56000
5y =3500
y=700 hours
x=3500-700=2800 hours
Needed 2800 hours of lawn and 700 hours of garden to breakeven

Answer 6)

Income before tax = income after tax/(1-tax)

Income before tax =57,750/(1-.30)

Income before tax =82,500

overall contribution margin to earn 82,500profit =before tax profit + fixed cost

overall contribution margin to earn 82,500profit =82500+56000

overall contribution margin to earn 82,500profit is 138,500

CM ratio is 64% (calculated above)

that means overall contribution margin is 64% of sales

Sales = Contribution margin/CM ratio

Sales = 138,500/64%

Sales = 277,000

Overall sales to earn after tax profit 57,750 = 277,000