Question

Lucido Products markets two computer games: Claimjumper and Makeover. A contribution format income statement for a recent month for the two games appears below: Claimjumper Makeover Total Sales $ 102,000 $ 51,000 $ 153,000 Variable expenses 37,720 8,180 45,900 Contribution margin $ 64,280 $ 42,820 107,100 Fixed expenses 77,700 Net operating income $ 29,400 Required: 1. What is the overall contribution margin (CM) ratio for the company? 2. What is the company's overall break-even point in dollar sales? 3. Prepare a contribution format income statement at the company's break-even point that shows the appropriate levels of sales for the two products.

Answer 1

Answer:

1.The overall contribution margin ratio for the company is 0.70.

2. The company's overall break even point in dollar sales is $111,000.

3. Contribution format statement:

                              Claimjumper      Makeover          Total

Sales                         74000      37000                111000

VC                                27365.4902 5934.509804 33300

Contribution                46634.5098  31065.4902         77700

Fixed Costs                                                                            77700

Net Income (contribution - fixed costs)                                 0

We follow these steps to arrive at the answer:

1. Calculation of Contribution margin:

$Contribution Margin = \frac{Total Contribution}{Total Sales}$

$Contribution Margin = \frac{107100}{153000}$

$Contribution Margin = 0.70$

2. Calculation of Break Even Point in Dollar Sales:

$Break Even Point in dollar sales = \frac{Total Fixed Costs}{Contribution Margin}$

$Break Even Point in dollar sales = \frac{77,700}{0.7}$

$Break Even Point in dollar sales = 111000$

3. Contribution format income statement

First we find the ratios of Claimjumper's and Makeover's sales to total sales.

Similarly we need to find the ratios of these products' individual variable costs to total variable costs.

Sales:

Claimjumper            $\frac{102000}{153000} = \frac{2}{3}$          

Makeover                 $\frac{51000}{153000} = \frac{1}{3}$

Variable Costs

Claimjumper            $\frac{37720}{102000} = 0.369803922$          

Makeover                 $\frac{8180}{51000} = 0.160392157$

At breakeven sales, the contribution format for Claimjumper is as follows:

                                             Claimjumper              

Sales                         $111000*\frac{2}{3} = 74000$    

less Variable Costs   $74000 * 0.369803922 = 27365.4902$

Contribution Margin  $74000 - 27365.4902 = 46634.5098$

At breakeven sales, the contribution format for Makeover is as follows:

                                             Makeover        

Sales                         $111000*\frac{1}{3} = 37000$    

less Variable Costs   $37000 * 0.160392157 = 5934.509804$

Contribution Margin  $37000 - 5934.509804 = 31065.4902$