Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2018, management estimates the following revenues and costs
| Sales | $1,800,000 | Selling expenses—variable | $70,000 |
| Direct materials | 430000 | Selling expenses—fixed | 65000 |
| Direct labor | 360000 | Administrative expenses—variable | 20000 |
| Manufacturing overhead—variable | 380000 | Administrative expenses—fixed | 60000 |
| Manufacturing overhead—fixed | 280000 |
Prepare a CVP income statement for 2018 based on management’s estimates.
Compute the break-even point in (1) units and (2) dollars.
Compute the contribution margin ratio and the margin of safety ratio.
Determine the sales dollars required to earn net income of $180,000
Answer:
1
2
Break-even point
= Fixed Costs/Contribution Margin
Total Units
= $1,800,000 in sales/$0.5 per unit
= 3,600,000 total units projected
Unit Contribution Margin
= $540,000/3,600,000 units
= $0.15
Break-even point
= $405,000/$0.15
= 2,700,000 units
Break-event point in $
= 2,700,000 x $0.5
= $1,350,000
3)
Contribution Margin Ratio
= (Sales –Variable Expenses)/Sales
= ($1,800,000 – $1,260,000)/$1,800,000
= 0.3 or 30%
Margin of Safety Ratio
= (Current Sales – Breakeven Point)/Current Sales
= (1,800,000 – $1,350,000)/(1,800,000)
= 0.25 or 20%
4)
Sales to achieve target net income
= (Fixed Costs + Target Income)/Contribution Margin Ratio
=($405,000 + $180,000)/0.3
= $1,950,000 in sales required to earn net income of $180,000
