Question

White Limited’s most recent income statement is shown below:

	Total			Per Unit
Sales (5,100 units)	$	163,200		$	32
Variable expenses		56,100			11
Contribution margin		107,100		$	21
Fixed expenses		91,350
Operating income	$	15,750

Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently):

1. The sales volume increases by 220 units.

2. The sales volume declines by 220 units.

3. The sales volume is 4,350 units.

Answer 1

1. The sales volume increases by 220 units from the existing 5100 units.

The new sales volume is 5100+220=5320

• Sales = 32* 5320 = $170,240
• Variable Expense= 11*5320=$58,520
• Contribution margin = Sales - Variable Expense = 170,240-58520=$111,720
• Fixed expense=$91,350 (does not change for change in sales volume)
• Operating income = Contribution margin - Fixed expense= 111,720 -91,350 = $20,370

The new income statement is

	Total		Per Unit
Sales (5,320 units)	$	170,240	$	32
Variable expenses		58,520		11
Contribution margin		111,720	$	21
Fixed expenses		91,350
Operating income	$	20,370

2. The sales volume declines by 220 units from the existing 5100 units.

The new sales volume is 5100-220=4880 units

• Sales = 32* 4880 = $156,160
• Variable Expense= 11*4880=$53,680
• Contribution margin = Sales - Variable Expense = 156,160-53,680=$102,480
• Fixed expense=$91,350 (does not change for change in sales volume)
• Operating income = Contribution margin - Fixed expense= 102,480 -91,350 = $11,130

The new income statement is

	Total		Per Unit
Sales (4,880 units)	$	156,160	$	32
Variable expenses		53,680		11
Contribution margin		102,480	$	21
Fixed expenses		91,350
Operating income	$	11,130

3. The sales volume is 4,350 units.

• Sales = 32* 4350 = $139,200
• Variable Expense= 11*4350=$47,850
• Contribution margin = Sales - Variable Expense = 139,200-47,850=$91,350
• Fixed expense=$91,350 (does not change for change in sales volume)
• Operating income = Contribution margin - Fixed expense= 91,350-91,350 = $0

The new income statement is

	Total		Per Unit
Sales (4,350 units)	$	139,200	$	32
Variable expenses		47,850		11
Contribution margin		91,350	$	21
Fixed expenses		91,350
Operating income	$	0

This indicates that 4350 units is the sales volume at which White limited can break even.