1. The contribution margin income statement of Bountiful Bean Coffee for February follows: (Click the icon to view the contribution margin income statement.) Bountiful Bean Coffee sells three small coffees for every large coffee. A small coffee sells for $2.00, with a variable expense of $1.00. A large coffee sells for $4.00, with a variable expense of $2.00. Requirements 1. Determine Bountiful Bean Coffee's monthly break-even point in numbers of small coffees and large coffees. Prove your answer by preparing a summary contribution margin income statement at the break-even level of sales. Show only two categories of expenses: variable and fixed. 2. Compute Bountiful Bean Coffee's margin of safety in dollars. 3. Use Bountiful Bean 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 the sales mix remains unchanged. Requirement 1. Determine Bountiful Bean Coffee's monthly break-even point in numbers of small coffees and large coffees. Begin by identifying the formula to compute the total break-even point in units. (1) (2) 14 (3) Break-even sales in units Now calculate the weighted-average contribution margin per unit. (Round the weighted-average contribution margin per unit to the nearest cent.) Small Large Total (4) Less: (5) (6) (7) (8) Weighted average contribution margin per unit The break-even point is small cups and large cups of coffee. Prepare a summary contribution margin income statement to prove your answer above. (For amounts with a zero balance, make sure to enter "0" in the appropriate cell.) Small Large Total (9) Less: (10) (11) Less: (12) Operating income Requirement 2. Compute Bountiful Bean Coffee's margin of safety in dollars. Identify the formula to compute the margin of safety in dollars. (13) (14) Margin of safety in dollars The margin of safety in dollars is $ Requirement 3. Use Bountiful Bean 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 the sales mix remains unchanged. Identify the formula to compute the operating leverage factor. (15) (16) = Operating leverage factor Bountiful Bean Coffee's operating leverage factor is (Round your answer to two decimal places.) If Bountiful Bean Coffee can increase sales revenue by 15%, keeping the sales mix the same, operating income will be $ Prepare a summary contribution margin income statement to prove your answer above. (For amounts with a zero balance, make sure to enter "O" in the appropriate cell.) Bountiful Bean Coffee Effect on Operating Income of 15% Increase in Sales Volume Current level Percent increase Dollar increase Sales revenue 15% 15% Less: Variable expenses Contribution margin Change in fixed expenses Operating income before sales increase Operating income after sales increase 1: Data Table $ 89,000 Bountiful Bean Coffee Contribution Margin Income Statement For the Month Ended February 29 Sales revenue Variable expenses: Cost of goods sold $ 28,000 Marketing expense 10,000 General and administrative expense 3,000 Contribution margin Fixed expenses: Marketing expense 33,000 General and administrative expense 7,000 41,000 48,000 40,000 $ Operating income 8,000
