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The Contribution Margin at the Breakeven Point

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1. Butler Sales Company is a distributor that has an exclusive franchise to sell a particular product made by another company. Butler Sales Company's income statements for the last two years are given below:

This Year Last Year
Units sold 200,000 160,000

Sales revenue \$1,000,000 \$800,000
Less cost of goods sold 700,000 560,000
Gross margin 300,000 240,000
Less operating expenses 210,000 198,000
Net operating income \$ 90,000 \$ 42,000

Operating expenses are a mixture of fixed costs and variable and mixed costs that vary with respect to the number of units sold.

Required:
a. Estimate the company's variable operating expenses per unit, and its total fixed operating expenses per year. (express it as a cost formula.)

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b. Compute the company's contribution margin for this year.

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2. Baker Company has a product that sells for \$20 per unit. The variable expenses are \$12 per unit, and fixed expenses total \$30,000 per year.

Required:
a. What is the total contribution margin at the break-even point?

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b. What is the contribution margin ratio for the product?

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c. If total sales increase by \$20,000 and fixed expenses remain unchanged, by how much would net operating income be expected to increase?

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d. The marketing manager wants to increase advertising by \$6,000 per year. How many additional units would have to be sold to increase overall net operating income by \$2,000?

Solution Preview

1. Butler Sales Company is a distributor that has an exclusive franchise to sell a particular product made by another company. Butler Sales Company's income statements for the last two years are given below:

This Year Last Year
Units sold 200,000 160,000

Sales revenue \$1,000,000 \$800,000
Less cost of goods sold 700,000 560,000
Gross margin 300,000 240,000
Less operating expenses 210,000 ...

Solution Summary

This discusses the contribution margin at the break-even point

\$2.19