Question

Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears below:

	Claimjumper				Makeover			Total
Sales	$	114,000			$	57,000		$	171,000
Variable expenses		28,360				5,840			34,200
Contribution margin	$	85,640			$	51,160			136,800
Fixed expenses									91,680
Net operating income								$	45,120

Required:

1. What is the overall contribution margin (CM) ratio for the company?

2. What is the company's overall break-even point in dollar sales?

3. Prepare a contribution format income statement at the company's break-even point that shows the appropriate levels of sales for the two products.

Answer 1

Answer (1) : The contribution margin ( CM) ratio for Lucido Products = Claimjumper : Makeover

                                                                                                                           = 85,640: 51,160

                                                                                                                           = 2141: 1279

Answer (2) : Break even point is described as an economic situation where the total cost of production of a firm is equal to its total income from the sales. Therefore, at the breakeven point, the firm does not earn any profit. Its income only equals the costs it incurred in the production.

                                  In this situation, the break-even point is 216,230 where the total cot of production is equal to the total returns from the sales.

Answer (3) : Since the break even point in this case is 216,230 , therefore , the total costs of the company reach this level when the contribution in the Claimjumber product is 62,445 and the contribution in the Makeover product is 27,965. This can be proven by the below explanation:

                                  The total cost of the form is 262960 and the total revenue generated is 216,230, now the firm will reach the break-even point when the contribution of the Claimjumper reaches (85,640 – 23,195 = 62,445 ) . Here 23,195 is the average of the difference between the total cost and total revenue of the firm. Similarly, the firm will reach the break-even point when the contribution of the Makeover reaches (51,160 – 23,195 = 27,965 ) .