Question

Gordon's Steel Parts produces parts for the automobile industry. The company has monthly fixed costs of $652,500

and a contribution margin of 90% of revenues.

1.	Compute Gordon's monthly breakeven sales in dollars. Use the contribution margin ratio approach.
2	Use contribution margin income statements to compute Gordon's monthly operating income or operating loss if revenues are $510,000 and if they are $1,030,000.
3.	Do the results in Requirement 2 make sense given the breakeven sales you computed in Requirement​ 1? Explain.

Answer 1

Ans.1	Break even sales in dollars =   Fixed cost / Contribution margin ratio
	$652,500 / 90%
	$725,000
Ans.2	If contribution margin ration is 90% of sales then the variable expenses ratio
	will be 10% of sales because variable expenses is the difference between sales
	and contribution margin.
	Gordon's Steel Parts
	Contribution Margin Income Statement
		Total
	Sales	$510,000
	Variable expenses ($510,000 * 10%)	-$51,000
	Contribution margin	$459,000
	Fixed expenses	-$652,500
	Net operating income	-$193,500
	Gordon's Steel Parts
	Contribution Margin Income Statement
		Total
	Sales	$1,030,000
	Variable expenses ($1,030,000 * 10%)	-$103,000
	Contribution margin	$927,000
	Fixed expenses	-$652,500
	Net operating income	$274,500
	*Fixed costs remain constant on each level of sales.
Ans.3	Break even is the level of activity on which the firm does not generate profit or occur any loss.
	So, the lower sales ($510,000) from the break even point ($725,000) will result in a loss and the higher
	sales ($1,030,000) from the break even point ($725,000) will result in a profit.