The contribution margin income statement of Cosmic Donuts ...



The contribution margin income statement of Cosmic Donuts for march 2012 follows:

Cosmic Donuts

Contribution Margin Income Statement

For the month of March 2012

Sales revenue $127,000

Cost of goods sold $32,400

Marketing costs $17,300

General and administrative cost $10,625 60,325

Contribution margin $66,675

Marketing costs $56,700

General and administrative cost $6,300 63,00

Operating income $3,675

Cosmic sell two dozen plain donuts for every dozen custard-filled donuts. A dozen plain donuts sells for $6, with total variable cost of $2 per dozen. a dozen custard-filled donuts sells for $8, with toatl variable cost of $5.50 per dozen.

Requirements

1. Determine cosmic's monthly breakeven point in dozens of plain donuts and custard-filled onuts. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.

2. Compute cosmics margin of safety in dollars for March 2012.

3. If Cosmic can increase monthly sales volume by 10%, what will opersting income be? (The sales mix remains unchanged)

Req. 1

| |Plain/doz |Filled/doz | |

|Sale price per unit |$6.00 |$8.00 | |

|Variable costs per unit | 2.00 | 5.50 | |

|Contribution margin per unit |$4.00 |$2.50 | |

|Sales mix in units | 2 | 1 | 3 |

|Contribution margin |$8.00 |$2.50 |$10.50 |

|Weighted-average CM ($10.50 / 3) | | |$ 3.50 |

|Breakeven sales in units |= |Fixed costs + Operating income |

| | |Weighted-average contribution |

| | |margin per unit |

| | | |

| | | |

| | | |

| |= |$63,000 + $0 | |

| | |$3.50 | |

| | | |

| |= | 18,000 units |

|Breakeven units | | |18,000 |

| | | | |

|Number of plain [18,000 × (2/3)] | | 12,000 |

| | | | |

|Number of custard-filled [18,000 × (1/3)] | | 6,000 |

Proof:

| |Plain/doz |Filled/doz |Total |

|Sales revenue |$72,000 |$48,000 |$120,000 |

|Variable costs | 24,000 | 33,000 | 57,000 |

|Contribution margin |$48,000 |$15,000 |63,000 |

|Fixed costs | | | 63,000 |

|Operating income | | |$ 0 |

Req. 2

|Margin of Safety |= |Expected Sales Dollars |− |Breakeven Sales Dollars |

|$7,000 |= |$127,000 |− |$120,000 |

Req. 3

If monthly sales volume increases 10%, sales revenue will be $139,700 ($127,000 × 1.10). The new operating income is computed as follows:

|Sales in dollars |= |Fixed costs + Operating income |

| | |Contribution margin ratio |

| | | |

|$139,700 |= |$63,000 + Operating income | |

| | |0.525* | |

| | | |

|Operating income |= | $10,343 |

*From Req. 1 “proof,” $63,000 / $120,000 = 0.525.

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