Question

most recent contribution format income statement is presented below Q3. Timeliner Company's $75,000 $45.000 $30,000 $36.000 $6.000 Sales Less: Variable Expenses Contribution Margin Less: Fixed Expenses Operating Loss The company sells its only product for $15 per unit. There were no beginning or ending inventories Required: a) Compute the company's break-even point in units sold S b) Compute the total variable expenses at the break-even point income of $9,000? c) How many units would have to be sold to earn a target operating d) The sales manager is convinced that a $6,000 increase in the advertising budget would increase total sales by $25,000. Would you advise the increased advertising outlay?

Answer 1

a)

Number of units sold = Sales/Selling price per unit

= 75,000/15

= 5,000

Variable cost per unit = Total variable cost/Number of units sold

= 45,000/5,000

= $9

Unit Contribution margin = Unit Selling price –Unit Variable cost

= 15 - 9

= $6

Break even point (units) = Fixed cost/Contribution margin per unit

= 36,000/6

= 6,000

b)

Total variable expenses at the break even = 6,000 x 9

= $54,000

c)

Units to be sold to get a target profit = (Fixed cost + Target profit)/Contribution margin per unit

= (36,000 + 9,000)/6

= 45,000/6

= 7,500

d)

Contribution margin income statement

Sales (75,000 + 25,000)	100,000
Variable cost	- 60,000
Contribution margin	40,000
Fixed cost	- 42,000
Operating income	(2,000)

If advertising budget is increased by $6,000, operating loss of the company would fall from $6,000 to $2,000. Thus, advertising outlay should be increased.

Kindly comment if you need further assistance. Thanks