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Sports-Reps, Inc., represents professional athletes and movie and television stars. The agency had revenue of $12,345,000 last year, with total variable costs of $5,678,700 and fixed costs of $2,192,400. Required: 1. What is the contribution margin ratio for Sports-Reps based on last year’s data? What is the break-even point in sales revenue? 2. What was the margin of safety for Sports-Reps last year? 3. One of Sports-Reps’s agents proposed that the firm begin cultivating high school sports stars around the nation. This proposal is expected to increase revenue by $230,000 per year, with increased fixed costs of $122,500. Is this proposal a good idea? Explain.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 16, Problem 14E
Textbook Problem
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Sports-Reps, Inc., represents professional athletes and movie and television stars. The agency had revenue of $12,345,000 last year, with total variable costs of $5,678,700 and fixed costs of $2,192,400.

Required:

  1. 1. What is the contribution margin ratio for Sports-Reps based on last year’s data? What is the break-even point in sales revenue?
  2. 2. What was the margin of safety for Sports-Reps last year?
  3. 3. One of Sports-Reps’s agents proposed that the firm begin cultivating high school sports stars around the nation. This proposal is expected to increase revenue by $230,000 per year, with increased fixed costs of $122,500. Is this proposal a good idea? Explain.

1.

To determine

Compute the contribution margin ratio and the break-even point in sales revenue.

Explanation of Solution

Contribution Margin Ratio: The contribution margin ratio shows the amount of difference in the actual sales value and the variable expenses in percentage. This margin indicates that percentage which is available for sale above the fixed costs and the profit. The formula for variable cost ratio is shown below:

Contribution Margin ratio = Contribution MarginSales

Break-Even in sales revenue: The break-even in sales revenue refers to the sales volume required to cover the fixed and variable costs and left out with neither profit nor loss.

Compute the contribution margin ratio:

Contribution Margin ratio = 1Variable CostSales=

2.

To determine

Compute the margin of safety in sales revenue.

3.

To determine

Analyze whether the proposal with an increase in revenue with a higher fixed cost is acceptable.

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Chapter 16 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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