Question

The following CVP income statements are available for Blanc Company and Noir Company.

		Blanc Company		Noir Company
Sales		$470,000		$470,000
Variable costs		282,000		235,000
Contribution margin		188,000		235,000
Fixed costs		169,200		216,200
Net income		$18,800		$18,800

Calculate Contribution margin ratio.

		Contribution Margin Ratio
Blanc Company
Noir Company

Compute the break-even point in dollars for each company. (Round answers to 0 decimal places, e.g. 5,125.)

		Break-even Point
Blanc Company		$
Noir Company		$

Compute margin of safety ratio for each company. (Round answers to 3 decimal places, e.g. 0.321.)

		Margin of Safety Ratio
Blanc Company
Noir Company

Compute the degree of operating leverage for each company. (Round answers to 2 decimal places, e.g. 1.56.)

		Degree of Operating Leverage
Blanc Company
Noir Company

Assuming that sales revenue increases by 20%, prepare a CVP income statement for each company. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Blanc Company		Noir Company
Administrative ExpensesVariable CostsCost of Goods SoldNet Income/(Loss)SalesGross ProfitTotal Variable ExpensesContribution MarginSelling ExpensesTotal Fixed ExpensesFixed Costs		$		$
Contribution MarginFixed CostsAdministrative ExpensesVariable CostsTotal Variable ExpensesNet Income/(Loss)SalesSelling ExpensesTotal Fixed ExpensesGross ProfitCost of Goods Sold
Cost of Goods SoldTotal Fixed ExpensesSalesSelling ExpensesAdministrative ExpensesNet Income/(Loss)Gross ProfitFixed CostsTotal Variable ExpensesVariable CostsContribution Margin
Variable CostsSalesSelling ExpensesFixed CostsGross ProfitNet Income/(Loss)Cost of Goods SoldAdministrative ExpensesTotal Variable ExpensesContribution MarginTotal Fixed Expenses
SalesFixed CostsAdministrative ExpensesTotal Variable ExpensesGross ProfitSelling ExpensesTotal Fixed ExpensesContribution MarginCost of Goods SoldNet Income/(Loss)Variable Costs		$		$

Assuming that sales revenue decreases by 20%, prepare a CVP income statement for each company. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Blanc Company		Noir Company
Contribution MarginAdministrative ExpensesVariable CostsNet Income/(Loss)Fixed CostsCost of Goods SoldSalesTotal Variable ExpensesTotal Fixed ExpensesSelling ExpensesGross Profit		$		$
Fixed CostsGross ProfitNet Income/(Loss)Cost of Goods SoldSalesAdministrative ExpensesContribution MarginSelling ExpensesTotal Fixed ExpensesTotal Variable ExpensesVariable Costs
Variable CostsContribution MarginFixed CostsCost of Goods SoldAdministrative ExpensesNet Income/(Loss)Gross ProfitTotal Fixed ExpensesSalesSelling ExpensesTotal Variable Expenses
Contribution MarginTotal Variable ExpensesTotal Fixed ExpensesNet Income/(Loss)Administrative ExpensesCost of Goods SoldFixed CostsVariable CostsGross ProfitSalesSelling Expenses
Variable CostsGross ProfitSelling ExpensesNet Income/(Loss)Cost of Goods SoldFixed CostsTotal Variable ExpensesSalesTotal Fixed ExpensesAdministrative ExpensesContribution Margin		$		$

Answer 1

Ans. 1	Contribution margin ratio = Contribution margin / Total sales * 100
	Blanc Company	$188,000 / $470,000 * 100	40%
	Noir Company	$235,000 / $470,000 * 100	50%
Ans. 2	Break even point in sales = Fixed costs / Contribution margin ratio
	Blanc Company	$169,200 / 40%	$423,000
	Noir Company	$216,200 / 50%	$432,400
Ans. 3	Margin of safety ratio = (Actual sales - Break even sales) / Actual sales * 100
	Blanc Company	($470,000 - $423,000) / $470,000 * 100
		$47,000 / $470,000 * 100
		10.000%
	Noir Company	($470,000 - $432,400) / $470,000 * 100
		$37,600 / $470,000 * 100
		8.000%
Ans. 4	Degree of operating leverage    =   Contribution margin / Operating income
	Blanc Company	$188,000 / $18,800	10.00
	Noir Company	$235,000 / $18,800	12.50
Ans. 5	*Increase in sales revenue would not affect the ratio of variable cost and contribution margin
	on sales.
	For Blanc company, the contribution margin ratio is 40% of sales it means the variable costs are
	60% (i.e. 1 - 40%) of sales.
	Just as, the contribution margin ratio is 50% of sales it means the variable costs are
	50% (i.e. 1 - 50%) of sales for Noir company.
	BLANC COMPANY
	CVP Income Statement
	Particulars	Amount
	Sales ($470,000 * 1.20)	$564,000
	Variable expenses ($564,000*60%)	-$338,400
	Contribution margin	$225,600
	Fixed expenses	-$18,800
	Net operating income	$206,800
	NOIR COMPANY
	CVP Income Statement
	Particulars	Amount
	Sales ($470,000 * 1.20)	$564,000
	Variable expenses ($564,000*50%)	-$282,000
	Contribution margin	$282,000
	Fixed expenses	-$18,800
	Net operating income	$263,200
	*Fixed costs always remain constant.