Question

Break-Even in Sales Revenue, Variable-Costing Ratio, Contribution Margin Ratio, Margin of Safety

Hammond Company runs a driving range and golf shop. The budgeted income statement for the coming year is as follows.

Sales	$1,240,000
Less: Variable expenses	706,800
Contribution margin	$533,200
Less: Fixed expenses	425,000
Income before taxes	$108,200
Less: Income taxes	43,280
Net income	$64,920

Required:

1. What is Hammond’s variable cost ratio? Enter your answer as a decimal value rounded to two decimal places.

What is the contribution margin ratio? Enter your answer as a decimal value rounded to two decimal places. (Express as a decimal-based amount rather than a whole percent.)

2. Suppose Hammond’s actual revenues are $200,000 greater than budgeted. By how much will before-tax profits increase? Calculate the answer without preparing a new income statement.
$

3. How much sales revenue must Hammond earn in order to break even? Round your answer to the nearest dollar.
$

What is the expected margin of safety? Round your answer to the nearest dollar.
$

4. How much sales revenue must Hammond generate to earn a before-tax profit of $130,000? Round your answer to the nearest dollar.
$

How much sales revenue must Hammond generate to earn an after-tax profit of $90,000? Round your answer to the nearest dollar.
$

Prepare a contribution margin income statement to verify the accuracy of your last answer. Round your answers to the nearest dollar.

Hammond Company
Contribution Margin Income Statement
Sales	$
Less: Variable expenses
Contribution margin	$
Less: Fixed expenses
Profit before taxes	$
Taxes
Net income	$

Answer 1

Answer 1

Variable cost ratio = Variable costs / Sales * 100

= 706,800 / 1,240,000 * 100

= 57%

Contribution ratio = 100 – Variable cost ratio

= 100 – 57%

= 43%

Answer 2

Increase in revenue = Increase in sales * contribution ratio

= 200,000 * 43%

= $ 86,000

Answer 3

Break even point = Fixed cost / Contribution ratio

= 425,000 / 43%

= $ 988,372.

Margin of safety = Actual sales – Break even sales

= 1,240,000 – 988,372

= $ 251,628

Answer 4

Sales for desired profit of $ 130,000 = (425,000 + 130,000) / 43%

= $ 1,290,698

Sales for desired profit of $ 90,000 = (425,000 + 150,000) / 43%

= $ 1,337,209

Contribution Margin Income Statement
Sales	$                           1,290,698
Less: Variable expenses	$                              735,698
Contribution margin	$                              555,000
Less: Fixed expenses	$                              425,000
Profit before taxes	$                              130,000
Taxes	$                                52,000
Net income	$                                78,000

Contribution Margin Income Statement
Sales	$             1,337,209
Less: Variable expenses	$               762,209
Contribution margin	$               575,000
Less: Fixed expenses	$               425,000
Profit before taxes	$               150,000
Taxes	$                 60,000
Net income	$                 90,000

In case of any doubt, please comment.