PPLY THE CONCEPTS:

Prepare a contribution margin income statement

Assume that you are part of the accounting team for Starr Computing. The company has only one product that sells for $80 per unit. Starr estimates total fixed costs to be $3,800. Starr estimates direct materials cost of $24.00 per unit, direct labor costs of $30.00 per unit, and variable overhead costs of $6.00 per unit. The CEO would like to see what the gross margin and operating income will be if 300 units are sold in the next period. Prepare a contribution margin income statement.

Starr Computing

Contribution Margin Income Statement

Sales

$

Less: Variable costs

Contribution margin

$

Less: Fixed costs

Operating income

$

PPLY THE CONCEPTS: Calculate the break-even point in sales dollars for Starr Computing

Further analysis of Starr Computings fixed costs revealed that the company actually faces annual fixed overhead costs of $4,200 and annual fixed selling and administrative costs of $1,800. Variable cost estimates are correct: direct materials cost, $24.00 per unit; direct labor costs, $30.00 per unit; and variable overhead costs, $6.00 per unit. At this time, the selling price of $80 will not change. Complete the following formulas for the revised fixed costs. Enter the ratio as a percentage.

Contribution Margin per Unit

=

$

$

=

$

Contribution Margin Ratio	=	$	=	%
		$

Now complete the formulas for (1) the break-even point in sales dollars and (2) the units sold at the break-even point. To calculate this, divide the break-even point in sales dollars by the unit selling price.

Break-Even Point in Sales Dollars	=	$	=	$
		%

Units Sold at Break-Even Point

=

units

Assume that the number of units that Starr sold exceeded the break-even point by one (1).

How much would operating income be? $

What would operating income be if the units sold exceeded the break-even point by five (5) units? $

APPLY THE CONCEPTS: Use the CVP graph to analyze the effects of changes in price and costs

Graph the following on your own paper. At the original position, the break-even point in sales dollars is $24,000 at 500 units. The fixed costs are $8,000.

Assume the slope of the sales line is equal to the selling price. When the two points of the sales line are at the origin and the break-even point, you see that the slope of the line is $48, which means that the selling price is $.

When the two points of the total costs line are at the origin and the break-even point, you see that the slope of the line is $32.00, which means that the variable cost per unit is $.

Leave the break-even point (x) at its original position. Use it as a reference point to answer the following questions. Analyze the scenarios by sliding the points on the lines to get the slope desired. Recall that the new break-even point for each scenario exists where the sales and total costs lines intersect. Compare it to the original break-even point (x). (You may want to put the lines back to their original position for each scenario.)