Question

Contribution Margin Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 74,800 units during the year. Cover-to-Cover Company Biblio Files Company Contribution margin ratio (percent) % % Unit contribution margin Break-even sales (units) Break-even sales (dollars) Income Statement - Cover-to-Cover Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8 Sales $374,000 Variable costs: $224,400 18,700 56,100 (299,200) $74,800 Manufacturing expense Selling expense Administrative expense Contribution margin Fixed costs: Manufacturing expense Selling expense Administrative expense Operating income $5,000 4,000 9,700 (18,700) $56,100

Answer 1

	Cover-to-Cover	Biblio Files
	Company	Company
Contribution margin ratio (percent) = Contribution Margin/Sales	20%	40%
Unit contribution margin	1	2
Break-even sales (units) = Fixed costs/Unit CM	18,700	46,750
Break-even sales (dollars) = Fixed costs/CM ratio	93,500	374,000

Weighted average contribution Margin = Contribution Margin from product 1*Weight of Product 1 + Contribution Margin from Product 2*Weight of Product 2
Let the weight of Basic be x
2.31 = 3.25*x + 0.9*(1-x)
2.31 = 3.25x + 0.9 - 0.9x
x = 0.6 i.e. 60%
Hence, weight of basic = 60%, Deluxe = 40%
Overall Break even sales In units = Fixed costs/Weighted average CM per unit
=339,570/2.31 = 147,000 units
Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
Basic	60%	88,200	441,000
Deluxe	40%	58,800	529,200
Cover to Cover
Contribution Margin ratio = 74800/374000	20%
Desired Sales = (Desired Profit + Fixed costs)/CM ratio	574,000
2.Biblio
Contribution Margin ratio	40%
Desired Sales = (Desired Profit + Fixed costs)/CM ratio	474,000
a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.