Calculating Contribution Margin, Contribution Margin Ratio, Break-Even Point
Hot Dog, Inc., makes one type of doggie sweater that it sells for $25 each. Its variable cost is $11 per sweater and its fixed costs total $8,600 per year. Hot Dog currently has the capacity to produce up to 1,000 sweaters per year, so its relevant range is zero to 1,000 sweaters.
Required:
1.Prepare a contribution margin income statement for Hot Dog assuming it sells 600 sweaters this year.
2.Without any calculations, determine Hot Dog’s total contribution margin if the company breaks even.
3.Calculate Hot Dog’s contribution margin per unit and its contribution margin ratio.
4.Calculate Hot Dog’s break-even point in number of units and in sales dollars.
5.Suppose Hot Dog wants to earn $3,000 this year. Determine how many sweaters it must sell to generate this amount of profit. Is this possible?
6.Prepare a cost-volume-profit graph for Hot Dog including lines for both total cost and sales revenue. Clearly identify fixed cost and the break-even point on your graph.
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