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# Able Co: Income statement, break even and CVP analysis

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Last year, Able Co. sold all the goods it produced (it had no finished goods inventories), and sales revenue were 1,260,000. It recorded the following cost for the year: see attached file

Costs Costs

Variable \$420,000 \$150,000 \$570,000
Fixed 220,500 260,000 480,500
Total \$640,500 \$410,000 \$1,050,500

(a)
Sales
- Cost of Goods Sold (Expense)
Gross Margin or Gross Profit
Selling & Admin (or GS&A or Operating expenses)
Net income (Operating income)

(b) Revenue - Variable costs - Fixed costs = Profit

(c) Let Y = sales dollars necessary for a before-tax target profit of \$250,000

(Revenue - Variable costs)/Revenue = Contribution margin ratio (Round to six decimal places)
The contribution margin ratio =

Using equation (2.10),
Y = (Target Profit + Fixed Cost)/Contribution Margin Ratio

(d) Let Y = sales dollars necessary to break even

Using equation (2.11),
Y = Fixed Cost/Contribution Margin Ratio

a. Prepare a financial reporting income statement (that is, in the form required under GAAP for U.S. External reporting).
b. Detemine income in the manner used in cost-volume-profit analysis
c. At what sales dollar level will Able earn a before-tax target profit of \$250,000
d. At what sales dollar level will Able break even.

##### Solution Preview

Manufacturing Costs Selling & Admin Costs Total Costs
Variable \$420,000 \$150,000 \$570,000
Fixed 220,500 260,000 480,500
Total \$640,500 \$410,000 \$1,050,500

Sales \$1,260,000.00
- Cost of Goods Sold (Expense) \$640,500
...

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###### Education
• BE, Bangalore University, India
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