Aminta Leon-Patnett (2011210176)

Hermain Tzib (200116452)

 ACTG 3015 – Managerial Accounting

Lecturer: Ms. Aurelia Cal

Assignment #1

96%

To be completed in pairs:  Please find a partner to work with and submit one paper.  Please
ensure that both names are clearly indicated on the paper as well as on the file name. 

Due Date: Tuesday, February 23 , 2021 at 11:59pm

rd

Note: Please provide formula for any computation.

1.  Define and explain how each of the following concepts are applied in the Cost-Volume-
Profit analysis: (24 marks)

A. Contribution margin: The contribution margin can be stated on a gross or per-unit basis.
It represents the incremental money generated for each product/unit sold after deducting
the variable portion of the firm's costs. The contribution margin represents the portion of
 a product's sales revenue that isn't used up by variable costs, and so contributes to
covering the company's fixed costs.

The concept of contribution margin is one of the fundamental keys in break-even

analysis. Low contribution margins are present in labor-intensive companies with few
fixed expenses, while capital-intensive, industrial companies have higher fixed costs and
thus, higher contribution margins. The contribution margin is computed as the difference
between the sale price of a product and the variable costs associated with its production
and sales process. 
 
Formula Contribution Margin=Sales Revenue − Variable Costs

B. Contribution margin per unit:  is the amount of the product selling price over and above
the variable cost per unit, it is the selling price of the product minus the variable cost that
was incurred to produce the product.

Formula: Selling price per unit -  variable costs per unit, or revenues per unit -
expenses per unit.

C. Contribution margin percentage: The contribution margin ratio is the difference between
a company’s sales and variable costs, expressed as a percentage.  This ratio shows the
amount of money available to cover fixed costs. It is good to have a high contribution
margin ratio, as the higher the ratio, the more money per product sold is available to
cover all the other expenses.

Contribution margin ratio formula: Fixed Expense + Operating Income/

Contribution Margin
Ratio                                                                                                     

2.  Suave Jeans Co. sells jeans wholesale to major retailers across the country. Each pair of
jeans has a selling price of $50 with $40 variable costs of goods sold. The company has fixed
manufacturing costs of $1,250,000 and fixed marketing costs of $250,000.

Required:

a)  How many jeans must Suave Jeans sell in order to break even? Use the Shortcut
Contribution Margin Method.                                                                   (10 marks) 
Contribution Margin
Selling Price =$50
Variable Cost=$40
Marginal C.= $10
 
Shortcut Contribution Margin Method Formula 
Sales Unit=Fixed Expense + Operational Cost
                  Marginal Cost
 
           = ($1,250,000+$250,000) + 0
                                10
=1,500,000
       10   

  =150,000 Jeans needs to be sold in order to Break-even

 Proof 
Selling Price (50*150,000) =7,500,000
Variable cost (40*150,000) =6,000,000
Marginal Cost (10*150,000) =1,500,000
Fixed Expense =1,500,000
Net Income                                 0 
 

b)  Use the equation method to determine how many jeans the company needs to sell in order
to reach a target profit of $320,000.                                                                (10 marks)

Sales Revenue-Variable Expense -Fixed Expense= Operational Cost 

50x-40x-375,000=320,000
10x- 375,000= 320,000
      +375,000     +375,000
10x= 695,000
10         10
X= 69,500 Jeans is needed to be sold to reach target profit of $320,000. 

Where does the $375,000 Fixed expense come from? The FE in the problem totals $1,500,000
-4

Proof 
Selling Price   50*69,500= 3,475,000
Variable Cost   40*69,500=2,780,000
Marginal Cost   10*69,500=695,000
Fixed Expense                 -   375,000
Net Income         $320,000

c)       If the company currently sells 275,000 jeans, what is the margin of safety in units and
dollars? Based on your analysis, indicate whether the company is a risky business or not. 
(18 marks)
Margin of safety formula in units formula = actual sales in units - breakeven sales in units
                                       = 275,000 - 150,000
           =125,000 jeans

Margin of safety formula in dollars formula = actual sales in dollars - breakeven sales in dollars
        = (275,000x$50) - (150,000x $50)
        = $13,750,000-$7,500,000
        = $6,250,000

Based on the analysis this is a very profitable business due to the fact that it is able to generate
$6,250,000 above break-even point, it is therefore more than able to meet its operating
expenses.     

                                                                                     
3.  BRC Printing imprints calendars with scenic landscapes. The company has fixed
expenses of $109,500 each month plus variable expenses of $8 per box of calendars. The
company sells each carton of calendars for $20 

Required:

a)      Compute the number of boxes of calendars that BRC must sell each month to break even.
Use any method.                                                                               (10 marks)
Sales Revenue $20
Less Variable Expense $8
Marginal Cost $12
Fixed Expense $109,500

Sales Unit =Fixed Expense +Operating Income 

Marginal per Unit 
=109,500 +0
12
=109,500
    12   
=9,125 boxes of calendars must be sold in order to break even.

 Proof 
 Sales Revenue $20*9,125= 182,500
Variable Expense $8*9,125=    -73,000
Marginal Cost $12*9,125= 109,500
Fixed Expense                         -$109,500
Net Income    0
b)      Compute the dollar amount of monthly sales that the company needs in order to earn
$285,000 in operating income.                                                               (10 marks)

 Sales Revenue $20=     100%

Variable Expense $8=     -40%
Marginal Cost/Ratio    $12 =     60%

Target Profit in $
Sales in dollars = Fixed Expense +Operating income 
Contribution Margin Unit 
=109,500+285,000
60%
=394,500
                             60%
Sales In dollars =$657,500

c)Prepare the company's contribution margin income statement for January for sales of 12,000
boxes of calendars. Explain if this scenario generates a higher or lower operating income than in
scenario b.                                                                         
               BRC Printing
Contribution Margin Income Statement 
For the Month ending January, 31

                                                                     Total      Per Unit     Percentage

Sales Revenue (20*12,000)                240,000          20                   100%
Less Variable Expenses(8*12,000)          -   96,000             8                    40%
Contribution margin     144,000           12                     60%
Less Fixed Expenses                                 - 109,500
Operating Income                                         $  34,500

This scenario indicates that at 12,000 boxes of calendars the company would be generating a
significantly lower operating income of $34,500, which is 2.73 times less than that generated in
scenario b whose operating income is $657,500 and selling 32,875 boxes of calendars. Optimally
the company would want to operate at maximum rates of returns. 
                                                   
TP units= FE+TP/CMC
               =109,500+285,000/12 
  =32,875 boxes