Sheridan 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 2014, management estimates the following revenues and costs.
Sales 1,800,000 Selling Expense V 70,000
Direct Material 430,000 Selling Expense F 65,000
Direct Labor 360,000 Administrative Exp V 20,000
Manufacturing OH. V. 380,000 Administrative Exp F 60,000
Manufacturing OH. F. 280,000
Instructions
(a) Prepare a CVP income statement for 2014 based on management’s estimates. (Show column for total amounts only.)
(b) Compute the break-even point in
(1) Units and
(2) Dollars.
(c) Compute the contribution margin ratio and the margin of safety ratio. (Round to nearest full percent.)
(d) Determine the sales dollars required to earn net income of $180,000
Answer:
Cost of goods sold
=Direct materials $430,000 + direct labor $360,000 + variable manufacturing overhead $380,000.
=1,170,000
(b)
Variable costs
= 70% of sales ($1,260,000 ÷ $1,800,000) or $.35 per bottle ($.50 X 70%). Total fixed costs
= $405,000.
1. $.50X = $.35X + $405,000
$.15X = $405,000
X = 2,700,000 units
2. 2,700,000 X $.50 = $1,350,000
(c)
Contribution margin ratio
= ($.50 – $.35) ÷ $.50
= 30% (or 1 – .70)
Margin of safety ratio
=($1,800,000 – $1,350,000) ÷ $1,800,000
= 25%
(d)
Required sales
X = 405,000+180,000/0.30
= $1,950,000
