Contribution margin income statement

Bountiful Bean Coffee
Contribution Margin Income Statement
Month Ended May 31
Sales revenue		$95,000
Less variable expenses:
Cost of goods sold	$30,000
Marketing expense	13,000
General and administrative expense	4,500	47,500
Contribution margin		$47,500
Less fixed expenses:
Marketing expense	$18,000
General and administrative expense	4,500	22,500
Operating income		$25,000

Requirements

1.	Determine the coffee shop's monthly breakeven point in the numbers of small coffees and large coffees. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of expenses: variable and fixed.
2.	Compute the coffee shop's margin of safety in dollars.
3.	Use the coffee shop's operating leverage factor (using the May contribution margin income statement) to determine its new operating income if sales volume increases 12%. Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged.

Question 1

Determine the coffee shop's monthly breakeven point in the numbers of small coffees and large coffees. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of expenses: variable and fixed.

Begin by identifying the formula to compute the total breakeven point in units. (Abbreviations used: avg. = Average; CM = Contribution margin.)

(

+

)

=

Breakeven 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
Less:
Weighted-average contribution margin per unit

The breakeven point is

small cups and

large cups of coffee.

Prepare a summary contribution margin income statement to prove your answer above. (Complete all input fields. For amounts with a $0 balance, make sure to enter "0" in the appropriate input field.)

	Small	Large	Total
Less:
Less:
Operating income

Compute the coffee shop's margin of safety in dollars.

Identify the formula to compute the margin of safety in dollars.

-

=

Margin of safety in dollars

The margin of safety in dollars is

.

Use the coffee shop's operating leverage factor (using the May contribution margin income statement) to determine its new operating income if sales volume increases 12%.

Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged.

Identify the formula to compute the operating leverage factor.

=

Operating leverage factor

(Round your answer to two decimal places.)

Bountiful Bean Coffee's operating leverage factor is

.

If Bountiful Bean Coffee can increase sales revenue by 12%, 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 $0 balance, make sure to enter "0" in the appropriate input field.)

Bountiful Bean Coffee
Effect on Operating Income of 12% Increase in Sales Volume
		Current level	Percent increase	Dollar increase
Sales revenue		12%
Less:	Variable expenses		12%
Contribution margin
Change in fixed expenses
Operating income before sales increase
Operating income after sales increase

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Question 2

Compute the number of cartons of calendars that

Try Spirit

Calendars must sell each month to breakeven.

Begin by determining the basic income statement equation.

-

-

=

Operating income

Using the basic income statement equation you determined above solve for the number of cartons to break even.

The breakeven sales is

cartons.

Compute the dollar amount of monthly sales Try Spirit Calendars needs in order to earn $338,000 in operating income.

Begin by determining the formula.

(

+

)

=

Target sales in dollars

(Round the contribution margin ratio to two decimal places.)

The monthly sales needed to earn $338,000 in operating income is

.

Prepare the company's contribution margin income statement for June for sales of 490,000 cartons of calendars.

Try Spirit
Contribution Margin Income Statement
Month Ended June 30

What is June's margin of safety (in dollars)? What is the operating leverage factor at this level of sales?

Begin by determining the formula.

-

=

Margin of safety (in dollars)

The margin of safety is

.

What is the operating leverage factor at this level of sales? Begin by determining the formula.

=

Operating leverage factor

(Round the operating leverage factor to three decimal places.)

The operating leverage factor is

.

By what percentage will operating income change if July's sales volume is 11% higher? Prove your answer. (Round the percentage to two decimal places.)

If volume increases 11%, then operating income will increase

%.

Prove your answer. (Round the percentage to two decimal places.)

Original volume (cartons)
Add: Increase in volume
New volume (cartons)
Multiplied by: Unit contribution margin
New total contribution margin
Less: Fixed expenses
New operating income
vs. Operating income before change in volume
Increase in operating income
Percentage change		%

The contribution margin income statement of Bountiful Bean Coffee for May follows: 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. 1. Compute the number of cartons of calendars that Try Spirit Calendars must sell each month to break even. 2. Compute the dollar amount of monthly sales that the company needs in order to earn $338,000 in operating income (round the contribution margin ratio to two decimal places). 3. Prepare the company's contribution margin income statement for June for sales of 490,000 cartons of calendars. 4. What is June's margin of safety (in dollars)? What is the operating leverage factor at this level of sales? 5. By what percentage will operating income change if July's sales volume is 11% higher? Prove your