Question

ACG 2071 - Comprehensive Problem III When submitting the completed project, it should include: 1. Please show all work and number each answer accordingly. 2. Round all answers to two decimal places. Parti-Use CVP to Plan Profits - worth a total of 21 points - 3 points for each question! Nottingham News Company has the rights to sell and deliver the city newspaper in a designated area in the country. A monthly subscription sells for $30.00 and Nottingham News pays $10.00 per month for each newspaper subscription. In addition to this variable cost. Nottingham News has foed costs of $3,000 per month. Nottingham News currently activity level is 700 subscriptions Required: 1. Calculate the contribution margin ratio and explain the ratio as it pertains to • Nottingham News Company. 2. Use the mathematical formula to calculate Nottingham News' monthly breakeven point in units (number of subscriptions). 3. Use the shortcut contribution margin approach to calculate Nottingham News monthly breakeven in units (number of subscriptions) 4. Prove the breakeven point by preparing a contribution margin income statement 5. Use the contribution margin ratio, which you calculated in number one to compute Nottingham News' breakeven point in sales dolors. 6. Calculate the margin of safety ratio and explain the ratio as it pertains to Nottingham News Company. 7. The owner of Nottingham News' wants to earn a $10.000 profit per month. Calculate the sales volume in units (number of subscriptions) and sales dollars required to achieve this level of profit.

Answer 1

1. Contribution margin rate = $ ( 30 - 10 ) / $ 30 * 100 = 66.67 %

This means that Nottingham News Company has a profit earning rate of 66.67 % of sales, once its fixed costs are recovered.

2. At break-even,

Total Variable Cost + Total Fixed Cost = Total Revenue

If the break-even quantity is Q

10 Q + 3,000 = 30 Q

or 20 Q = 3,000

Q = 3,000 / 20 = 150 subscriptions.

3. Monthly break-even in units = Total Fixed Cost per Month / Contribution Margin per Unit = $ 3,000 / $ 20 = 150 subscriptions.

4.

Contribution Margin Income Statement
Sales ( 150 units @ $ 30 )	$ 4,500
Less: Variable Cost ( 150 units @ $ 10)	1,500
Contribution Margin	3,000
Fixed Cost	3,000
Net Operating Income	$ 0

5. Break-even point in sales dollars = Total Fixed Cost / Contribution Margin Ratio = $ 3,000 / 66.67 % = $ 4,500.

6. Margin of safety = Actual Sales Revenue - Break-even Sales Revenue = 700 - 150 = 550 subscriptions.

Margin of Safety Ratio = 550 / 700 * 100 = 78.57 %

This means that Nottingham News Company currently enjoys a cushion of 78.57 % over and above the break-even point, or its revenues have to fall 78.57 % before it hits the break-even point and enters the loss area.

7. Sales volume in units required = $ ( 3,000 + 10,000 ) / $ 20 = 650 subscriptions.

Sales dollars required to achieve $ 10,000 profit per month = $ 13,000 / 66.67 % = $ 19,500