Question

9. Develop a profit-and-loss statement for the Westgate division of North Industries. This division manufactures light fixtures sold to consumers through home improvement and hardware stores. Cost of goods sold represents 40% of sales. Marketing expenses include selling expenses, promotion expenses, and freight. Selling expenses include sales salaries totaling $3 million per year and sales commissions (5% of sales). The company spent $3 million on advertising last year, and freight costs were 10% of sales. Other costs include $2 million for managerial salaries and expenses for the marketing function and another $3 million for indirect overhead allocated to the division.

Develop the profit-and-loss statement. The sales revenue was $40 million last year from sale of 200,000 fixtures. Calculate Westgate’s breakeven sales.

Answer 1

PROFIT AND LOSS STATEMENT :
			Sales		$ 40,000,000.00
Less: Variable cost
Cost of goods sold (20*40%)	$ 16,000,000.00
Sales commission (20*5%)	$    2,000,000.00
Freight cost (20*10%)	$    4,000,000.00	$ 22,000,000.00
Contribution margin		$ 18,000,000.00
Less: Fixed expenses
Selling expenses	$    3,000,000.00
Advertising expenses	$    3,000,000.00
Managerial salaries	$    2,000,000.00
Indirect overhead	$    3,000,000.00	$ 11,000,000.00
Net Profit		$   7,000,000.00

Break even sales = Fixed cost/contribution margin = 40,000,000/45% = $88,888,888.89

contribution margin ratio =18,000,000 /40,000,000 = 45%