Arberg Company’s controller prepared the following budgeted income statement for the coming year: Sales $423,000 Variable...
Arberg Company’s controller prepared the following budgeted income statement for the coming year:
| Sales | $423,000 |
| Variable cost | 329,940 |
| Contribution margin | $93,060 |
| Fixed cost | 51,040 |
| Operating income | $42,020 |
| Required: | |
| 1. | What is Arberg’s variable cost ratio? What is its contribution margin ratio? |
| 2. | Suppose Arberg’s actual revenues are $30,100 more than budgeted. By how much will operating income increase? Give the answer without preparing a new income statement. |
| 3. | How much sales revenue must Arberg earn to break even? Prepare a contribution margin income statement to verify the accuracy of your answer. |
| 4. | What is Arberg’s expected margin of safety? |
| 5. | What is Arberg’s margin of safety if sales revenue is $384,000? |
Homework Answers
1.
Variable cost ratio = Variable cost/Sales
= 329,940/423,000
= 78%
Contribution margin ratio = Contribution margin/Sales
= 93,060/423,000
= 22%
2.
Operating income = Sales x Contribution margin ratio – Fixed costs
= 453,100 x 22% - 51,040
= $48,642
Hence, operating income will increase by = 48,642 - 42,020
= $6,622
3.
Break even point ($) = Fixed cost/Contribution margin ratio
= 51,040/22%
= $232,000
Contribution income statement
| Sales | 232,000 |
| Variable cost | - 180,960 |
| Contribution margin | 51,040 |
| Fixed cost | - 51,040 |
| Operating income | 0 |
4.
Margin of safety = Present sales - Break even sales
= 423,000 - 232,000
= $191,000
5.
Margin of safety = Present sales - Break even sales
= 384,000 - 232,000
= $152,000
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