Chapter 21 CostVolume Profit Analysis Demonstration Problems 2016

E 21 -31 For its top managers, Global Travel formats income statement as follows: Global Travel Income Statement For the Month Ended March 31, 2016 Sales Revenue $ 318, 500 Variable Costs 111, 475 Contribution Margin 207, 025 Fixed Costs 175, 000 Operating Income $ 32, 025 Jackson’s relevant range is between sales of $250, 000 and $360, 000. Requirements 1. Calculate the contribution margin ratio. 2. Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) © 2016 Dr. Keith D. Moon. 21 -2

E 21 -31 Requirement 1: Calculate the contribution margin ratio. Contribution margin ratio =

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement © 2016 Dr. Keith D. Moon. 21 -7

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ © 2016 Dr. Keith D. Moon. 250, 000 21 -8

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ Variable Costs (35% of sales) 250, 000 87, 500 If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -9

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ Variable Costs (35% of sales) Contribution Margin 250, 000 87, 500 162, 500 If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -10

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ Variable Costs (35% of sales) 250, 000 87, 500 Contribution Margin 162, 500 Fixed Costs 175, 000 If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -11

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ Variable Costs (35% of sales) 250, 000 87, 500 Contribution Margin 162, 500 Fixed Costs 175, 000 Operating Income (Loss) $ (12, 500) If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -12

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ 360, 000 If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -13

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ Variable Costs (35% of sales) 360, 000 126, 000 If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -14

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ 360, 000 Variable Costs (35% of sales) 126, 000 Contribution Margin 234, 000 If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -15

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ 360, 000 Variable Costs (35% of sales) 126, 000 Contribution Margin 234, 000 Fixed Costs 175, 000 If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -16

E 21 -31 Requirement 2: Prepare two contribution margin income statements: one at the $250, 000 sales level and one at the $360, 000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range. ) Global Travel Income Statement Sales Revenue $ 360, 000 Variable Costs (35% of sales) 126, 000 Contribution Margin 234, 000 Fixed Costs 175, 000 Operating Income (Loss) $ 59, 000 If the contribution margin ratio is 65% (that is, contribution margin is 65% of sales), then variable costs must be 35% of sales. © 2016 Dr. Keith D. Moon. 21 -17

E 21 -38 Ricky's Repair Shop has a monthly target profit of $17, 000. Variable costs are 60% of sales, and monthly fixed costs are $8, 000. Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. 2. Express Ricky's margin of safety as a percentage of target sales. © 2016 Dr. Keith D. Moon. 21 -18

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. = Fixed costs + Target profit Contribution margin ratio © 2016 Dr. Keith D. Moon. 21 -20 Required sales in dollars for break-even

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Required sales in dollars for break-even = Fixed costs + Target profit Contribution margin ratio If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales. © 2016 Dr. Keith D. Moon. 21 -21

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Required sales in dollars for break-even = Fixed costs + Target profit Contribution margin ratio = $8, 000 + $0 40% If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales. © 2016 Dr. Keith D. Moon. 21 -22

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Required sales in dollars for break-even = Fixed costs + Target profit Contribution margin ratio = $8, 000 + $0 40% = $20, 000 If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales. © 2016 Dr. Keith D. Moon. 21 -23

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Required sales in dollars for target profit = Fixed costs + Target profit Contribution margin ratio If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales. © 2016 Dr. Keith D. Moon. 21 -24

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Required sales in dollars for target profit = Fixed costs + Target profit Contribution margin ratio = $8, 000 + $17, 000 40% If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales. © 2016 Dr. Keith D. Moon. 21 -25

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Required sales in dollars for target profit = Fixed costs + Target profit Contribution margin ratio = $8, 000 + $17, 000 40% = $62, 500 If variable costs are 60% of sales, then the contribution margin ratio must be 40% of sales. © 2016 Dr. Keith D. Moon. 21 -26

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Margin of safety in dollars = Expected sales – Break-even sales © 2016 Dr. Keith D. Moon. 21 -28

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Margin of safety in dollars = Expected sales – Break-even sales = $62, 500 – $20, 000 © 2016 Dr. Keith D. Moon. 21 -29

E 21 -38 Requirement 1: Compute the monthly margin of safety in dollars if the company achieves its income goal. Margin of safety in dollars = Expected sales – Break-even sales = $62, 500 – $20, 000 = $42, 500 © 2016 Dr. Keith D. Moon. 21 -30

E 21 -38 Requirement 2: Express Ricky's margin of safety as a percentage of target sales. Margin of safety ratio = Margin of safety in dollars Expected sales in dollars © 2016 Dr. Keith D. Moon. 21 -32

E 21 -38 Requirement 2: Express Ricky's margin of safety as a percentage of target sales. Margin of safety ratio = = Margin of safety in dollars Expected sales in dollars $42, 500 $62, 500 © 2016 Dr. Keith D. Moon. 21 -33

E 21 -38 Requirement 2: Express Ricky's margin of safety as a percentage of target sales. Margin of safety ratio = = Margin of safety in dollars Expected sales in dollars $42, 500 $62, 500 = 68% © 2016 Dr. Keith D. Moon. 21 -34