Smith Company sells flags with team logos. Smith has fixed costs of $1,000,000 p

Question

Smith Company sells flags with team logos. Smith has fixed costs of $1,000,000 per year plus variabic costs of S10.00 per fag. Each flag sells tor $20.00 Re ad the eqitements Rcarrange the tormula you determined above and compute the required number o flags to break even. The number of flags Smith must sll each year to break even is999970 Requirement 2. Use the contribution margin ratio approach to compute the dollar sales Smith needs to earn $40 000 in aperating income for 2018. (Round the contribution margin ratio to two decimal places) Begin by showing the formula and thenentering the amounts to calculate the required sales dollars to earn S40,000 in operating income. (Round the required sales in dollars up to the nearest whole dollar. For example, $10.25 would be rournded lo eak even Abbreviation used CM-contribution margin) CM ratio + )1 - Required sales in dollars )i Requirement 3. Prepare Smith's contribution margin income statement for the year ended December 31, 2018, for sales of 92,000 flags. (Round your final answers up to the next whole number) (Use parentheses or a minus sign for an operating Smith Company Contribution Margin Income Statement Year Ended December 31, 2018 Sales Revenuc Variable Contribution Margin Fixed CostS Operatng Income (LoSS) Costs

Explanation / Answer

Solution 1:

Selling price per flag = $20

Variable cost per flag = $10

Contribution margin per unit = $20 - $10 = $10 per flag

Fixed cost = $1,000,000

Nos of flags smith must sell each year to breakeven = Fixed cost / contribution margin per unit = $1,000,000 / $10 = 100000 flags

Solution 2:

Target operating income = $40,000

Contribution margin ratio = $10 / $20 = 50%

Dollar sales needed to earn target operating income = (Target operating income + Fixed cost) / contribution margin ratio

= ($40,000 + $1,000,000) /50% = $2,080,000

Solution 3:

Solution 4:

New fixed cost = $1,000,000 * 130% = $1,300,000

New variable cost per unit = $10 + $2 = $12 per unit

New contribution margin per unit = $20 - $12 = $8 per unit

Let breakeven sales units is X

Now at breakeven sales target profit is zero

Therefore

Sales - Variable cost - Fixed cost = 0

$20 X - $12X - $1,300,000 = 0

8X= $1,300,000

X = 162500 flags

Therefore breakeven sales units under expansion is 162500 units.

Breakeven sales in dollar under expansion = 162500 * $20 = $3,250,000

Smith should only undertake the expansion if expected profit from expansion are higher than expected costs.

Smith Company Contribution margin income statement For year ended December 31, 2018 Particulars Amount Sales Revenue $1,840,000.00 Variable costs $920,000.00 Contribution margin $920,000.00 Fixed costs $1,000,000.00 Operating income (Loss) -$80,000.00

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