Question

The Proportion Challenged Candy Co. makes and sells boxes of chocolate candy. Proportion has fixed expenses of $250,000 each month plus variable expenses of $5.25 per box of candy. Proportion sells each box of candy for $9.75.

• Compute the contribution margin of each box of candy.

• Compute the number of boxes of candy that Proportion must sell each month to break even. Round up to the nearest whole box.

• Compute the contribution margin ratio for a box of candy

.

• Compute the dollar amount of monthly sales Proportion needs to earn $300,000 in profit. (Round the contribution margin ratio to four decimal places. Round sales up to the nearest dollar.)

• Prepare Proportion’s contribution margin income statement for December for sales of 260,000 boxes of candy.

• What is the degree of leverage for December sales of 260,000 boxes of candy? (Carry answer out to four decimal places.)

• What is December’s margin of safety (in dollars and cents)?

• By what percentage will operating income change if December’s sales volume is 23% higher? (Round to two decimal places.)

• Prove your answer by comparing the difference in operating income after the change with the operating income before the change.

Answer 1

Contribution Margin per box = Selling price per box – Variable cost per box

= 9.75 – 5.25

= $4.5

Number of boxes = Fixed costs/Contribution Margin per Unit

= 250,000/4.5

= 55,556 boxes

CM Ratio = CM/Sales

= 4.5/9.75

= 46.15%

Dollar amount required = (desired profit+Fixed costs)/CM ratio

= (300,000+250,000)/46.15%

= $1,191,765.98

CM Income Statement
Sales	2,535,000
Varaible Costs	1,365,000
Contribution Margin	1,170,000
Fixed costs	250,000
Operating Income	920,000

Degree of operating leverage = Contribution Margin/Operating income

= 1,170,000/920,000

= 1.2717

Margin of safety in dollars = Sales – break even sales

= 2,535,000 – 541,711.81

= $1,993,208.19

Change = 23%*1.2717 = 29.2491%

CM Income Statement
Sales	3,118,050
Varaible Costs	1,678,950
Contribution Margin	1,439,100
Fixed costs	250,000
Operating Income	1,189,100
Before change	920,000
Change	269,100