CVP analysis at a multiproduct firm (Learning Objectives 4, S)

The contribution margin income statement of Extreme Coffee for February 2008 follows:

Extreme Coffee sells three small coffees for every large coffee. A small coffee sells for $2, with a variable expense of $1. A large coffee sells for $4, with a variable expense of $2.
Requirements 1. Determine Extreme Coffee’s monthly breakeven point in the numbers of small coffees and large coffees. Prove your answer by preparing a summary contribu¬ tion margin income statement at the breakeven level of sales. Show only two categories of expenses: variable and fixed.
2. Compute Extreme Coffee’s margin of safety in dollars.
3. Use Extreme Coffee’s operating leverage factor to determine its new operating income if sales volume increases 15%. Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged.

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EXTREME COFFEE Contribution Margin Income Statement For the Month Ended February 29, 2008 Sales revenue. $90,000 Variable expenses: Cost of goods sold $32,000 Marketing expense. 10,000 General and administrative expense 3,000 45,000 Contribution margin. 45,000 Fixed expenses: Marketing expense. 16,500 General and administrative expense. 3,500 20,000 Operating income........ $25,000