Break-Even in Sales Revenue, Variable-Costing Ratio, Contribution Margin Ratio, Margin of Safety
Hammond Company runs a driving range and golf shop. The budgeted income statement for the coming year is as follows.
- What is Hammond’s variable cost ratio? Enter your answer as a decimal value rounded to two decimal places.
What is the contribution margin ratio? Enter your answer as a decimal value rounded to two decimal places. (Express as a decimal-based amount rather than a whole percent.)
- Suppose Hammond’s actual revenues are $200,000 greater than budgeted. By how much will before-tax profits increase? Calculate the answer without preparing a new income statement.
- How much sales revenue must Hammond earn in order to break even? Round your answer to the nearest dollar.
What is the expected margin of safety? Round your answer to the nearest dollar.
- How much sales revenue must Hammond generate to earn a before-tax profit of $130,000? Round your answer to the nearest dollar.
How much sales revenue must Hammond generate to earn an after-tax profit of $90,000? Round your answer to the nearest dollar.
Prepare a contribution margin income statement to verify the accuracy of your last answer. Round your answers to the nearest dollar.
Variable cost ratio = Variable costs / Sales * 100
= 706,800 / 1,240,000 * 100
Contribution ratio = 100 – Variable cost ratio
= 100 – 57%
Increase in revenue = Increase in sales * contribution ratio
= 200,000 * 43%
= $ 86,000
Break even point = Fixed cost / Contribution ratio
= 425,000 / 43%
= $ 988,372.
Margin of safety = Actual sales – Break even sales
= 1,240,000 – 988,372
= $ 251,628
Sales for desired profit of $ 130,000 = (425,000 + 130,000) / 43%
= $ 1,290,698
Sales for desired profit of $ 90,000 = (425,000 + 150,000) / 43%
= $ 1,337,209