Question

The following CVP income statements are available for Blanc Company and Noir Company. Sales Variable costs Contribution margin Fixed costs Net income Blanc Company $560,000 336,000 224,000 196,000 $28,000 Noir Company $560,000 280,000 280,000 252,000 $28,000 Calculate Contribution margin ratio. (Round answers to 2 decimal places, e.g. 0.32.) Contribution Margin Ratio Blanc Company Noir Company

Answer 1

Ans:

1. Contribution Margin Ratio Formula- (Contribution Margin / Sales)

	Contribution Margin ratio
Blanc Comapany	($224000 / $560000)*100 = 0.40
Noir Company	($280000 / $560000)*100 = 0.50

2. Break Even Point in Dollars Formula- Fixed Costs / Contribution Margin

	Break even point in dollars
Blanc Comapany	$196000 / 0.40 = $490000
Noir Company	$252000 / 0.50 = $504000

3. Margin of Safety Ratio formula - (Current Level Sales - Break even Sales/ Current level Sales) *100

	Margin of Safety Ratio
Blanc Comapany	($560000-$490000)/$560000 * 100 = 12.5%
Noir Company	($560000-$504000)/$560000 * 100 = 10%

4. Degree of Operating leverage formula - Contribution Margin / Operating income, Where Operating Income = Sales - Variable costs - fixed costs

	Degree of Operating leverage
Blanc Company	$224000 / ($560000-$336000-$196000) = 8
Noir Company	$280000 / ($560000-$280000-$252000) = 10

5. CVP Income Statement for both Companies. Sales Revenue Increases by 20%.

Assuming that Revenue is increasing due to sales volume and therefore, variable cost will also increase. Fixed cost will remain unchanged irrespective of the sales volume.

			Blanc Company		Noir Company
1	Sales	$560000 * 120%	$672000	$560000 * 120%	$672000
2	Variable Costs	$336000 * 120%	$403200	$280000 * 120%	$336000
3	Contribution Margin (1-2)		$268800		$336000
4	Fixed Costs		$196000		$252000
5	Net Income (3-4)		$72800		$84000

6. CVP Income Statement for both Companies. Sales Revenue decreases by 20%.

Assuming that Revenue is decreasing due to sales volume and therefore, variable cost will also decrease. Fixed cost will remain unchanged irrespective of the sales volume.

			Blanc Company		Noir Company
1	Sales	$560000 * 80%	$448000	$560000 * 80%	$448000
2	Variableb Costs	$336000 * 80%	$268800	$280000 * 80%	$224000
3	Contribution Margin		$179200		$224000
4	Fixed Cost		$196000		$252000
5	Net Income		($16800)		($28000)