Chapter 21, Problem 6BPSB

To determine

Break-even point in dollar sales:

It is the value of sales in dollar where a company is neither making profit nor incurring any loss.

Contribution Margin Income Statement:

A contribution margin income statement separates the variable cost and fixed cost. The variable costs are deducted first from the sales revenue to arrive at contribution margin, from which fixed costs are deducted to determine the net income or loss.

To determine:

1. Compute the break-even point in dollar sales under the (a) existing business strategy and (b) new strategy that alters both unit selling price and variable costs.

2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of (a) the existing strategy and (b) changing to the new strategy.

Answer to Problem 6BPSB

Solution:

1.

Break-Even Point in dollars
Existing Strategy	New Strategy
$1,727,273	$1,727,273

2.

Net Income
Existing Strategy	New Strategy
$112,500	$475,500
After-tax return sales
5.6%	16.5%

Explanation of Solution

Explanation:

	Existing Strategy	New Strategy
Sales price per unit Existing Strategy New Strategy [$20.00 X (1-20%)]	$20.00	$16.00
Total Variable Cost per unit
Unit Costs ($800,000 / 100,000)	$8.00
Unit Costs ($800,000 / 100,000) X (1 -25%)		$6.00
Packaging ($100,000/ 100,000)	$1.00
Packaging ($100,000/ 100,000) X (1+20%)		$1.20
Total Variable Cost per unit	$9.00	$7.20
Contribution margin	$11.00 ($20.00 - $9.00)	$8.80 ($16.00 - $7.20)
Contribution margin ratio	55% ($11.00/$20.00)	55% ($8.80/$16.00)

$\begin{array}{l}Break-EvenPointindollarsales=\frac{FixedCost}{Contributionmarginratio}\\ ExistingStrategy\\ Break-EvenPointindollarsales=\frac{\$950,000}{\text{0}.55}\\ =\$1,727,273\\ NewStrategy\\ Break-EvenPointindollarsales=\frac{\$950,000}{\text{0}.55}\\ =\$1,727,273\end{array}$

2.

BEST COMPANY Contribution Margin Income Statement
	Existing Strategy	New Strategy
Sales Revenue	$2,000,000	$2,880,000
Less: Variable Cost	$900,000	$1,296,000
Contribution Margin	$1,100,000	$1,584,000
Less: Fixed Cost	$950,000	$950,000
Income before taxes	$150,000	$634,000
Income Taxes (25% rate)	$37,500	$158,500
Net Income	$112,500	$475,500

Computation of after-tax return on sales

$\begin{array}{l}After-TaxReturnonsales=\frac{NetIncome}{Sales}\hfill \\ \hfill \\ ExistingStrategy=\frac{\$112,500}{\$2,000,000}\hfill \\ =5.6\%\hfill \\ \hfill \\ NewStrategy=\frac{\$475,500}{\$2,880,000}\hfill \\ =\text{ 16}.5\%\hfill \end{array}$

Conclusion

Conclusion:

The after-tax return on sales for existing strategy is 5.6% and new strategy is 16.5%.