Question

Bags Unlimited manufactures and markets backpacks for the youth market. Financial projections for this line of products are revenues of $1,238,000, total variable costs of $841,840 and fixed costs of $218,000. Answer each of the following independent questions.

a. Compute the contribution margin. ______________________

b. Compute the contribution rate. ______________________________

c. How much of this product line does the business need to sell to break even? ___________

d. If the business was to save $56,000 in variable costs by offering fewer colors of backpacks, how much of this product line does the business need to sell to break even?

________________________

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Answer 1

Answer:

Part a.

Contribution Margin = Sales – Variable Cost

Contribution Margin = $1,238,000 - $841,840

Contribution Margin = $396,160

Part b.

Contribution Rate = $Contribution Margin \over Sales$x 100

Contribution Rate = $396,160 \over 1,238,000$ x 100

Contribution Rate = 32%

Part c.

Break Even Point (Dollar Sales) = $Fixed Cost \over Contribution rate$

Break Even Point (Dollar Sales) = $218,000 \over 0.32$

Break Even Point (Dollar Sales) = $681,250

Part d.

Proposed Variable Cost = $841,840 - $56,000

Proposed Variable Cost = $785,840

Proposed Contribution Margin = $1,238,000 - $785,840

Proposed Contribution Margin = $452,160

Proposed Contribution Rate = $452,160 \over 1,238,000$x 100

Proposed Contribution Rate = 36.52%

Break Even Point (Dollar Sales) = $Fixed Cost \over Contribution rate$

New Break Even Point (Dollar Sales) = $218,000 \over 0.3652$

New Break Even Point (Dollar Sales) = $596,933