Question

ULRIKE Company bottles and distributes Apfelsaft, a children’s drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charges customers 70 cents per bottle. For the year 2018, management estimates the following revenues and costs.

Sales	$2,500,000
Direct Materials	360,000
Direct Labor	450,000
Manufacturing overhead – variable	270,000
Manufacturing overhead – fixed	380,000
Selling expenses – variable	80,000
Selling expenses – fixed	250,000
Administrative expenses – variable	40,000
Administrative expenses – fixed	150,000

Instructions

1. Prepare a CVP income statement for 2018 based on management’s estimates (show column for total amounts only).
2. Compute the break-even point in (1) units and (2) dollars.
3. Compute the contribution margin ratio and the margin of safety ratio (round to nearest full percent).
4. Determine the sales dollars required to earn net income of $624,000.

Answer 1

Answer 1.

$ 2,500,000 S ULRIKE COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2018 Sales Variable expenses: Cost of goods sold 1,080,000 Selling expenses 80,000 Administrative expenses S 40,000 Total variable expenses Contribution margin Fixed expenses: Cost of goods sold 380,000 Selling expenses 250,000 Administrative expenses 150,000 Total fixed expenses Net income (loss) $ $ 1,200,000 1,300,000 780,000 520,000

Variable Cost of Goods Sold = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Variable Cost of Goods Sold = $360,000 + $450,000 + $270,000
Variable Cost of Goods Sold = $1,080,000

Fixed Cost of Goods Sold = Fixed Manufacturing Overhead
Fixed Cost of Goods Sold = $380,000

Answer 2.

Number of bottles sold = Sales / Selling Price per bottle
Number of bottles sold = $2,500,000 / $0.50
Number of bottles sold = 5,000,000

Variable Cost per bottle = Variable Expenses / Number of bottles sold
Variable Cost per bottle = $1,080,000 / 5,000,000
Variable Cost per bottle = $0.216

Contribution Margin per bottle = Selling Price per bottle - Variable Cost per bottle
Contribution Margin per bottle = $0.500 - $0.216
Contribution Margin per bottle = $0.284

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per bottle
Breakeven Point in unit sales = $780,000 / $0.284
Breakeven Point in unit sales = 2,746,479 bottles

Breakeven Point in dollar sales = Breakeven Point in unit sales * Selling Price per bottle
Breakeven Point in dollar sales = 2,746,479 * $0.500
Breakeven Point in dollar sales = $1,373,240

Answer 3.

Contribution Margin Ratio = Contribution Margin per bottle / Selling Price per bottle
Contribution Margin Ratio = $0.284 / $0.500
Contribution Margin Ratio = 0.57 or 57%

Margin of Safety Ratio = (Sales - Breakeven Point in dollar sales) / Sales
Margin of Safety Ratio = ($2,500,000 - $1,373,240) / $2,500,000
Margin of Safety Ratio = 0.45 or 45%

Answer 4.

Required sales dollars = (Fixed Expenses + Target Profit) / Contribution Margin Ratio
Required sales dollars = ($780,000 + $624,000) / 0.57
Required sales dollars = $2,463,158