Edger Dry Cleaners has determined the following about its costs: Total variable

Question

Edger Dry Cleaners has determined the following about its costs: Total variable expenses are $40,000, total fixed expenses are $30,000, and the sales revenue needed to break even is $40,000. Determine the company's current 1) sales revenue and 2) operating income. (Hint: First, find the contribution margin ratio; then prepare the contribution margin income statement.) Use the contribution margin income statement and the shortcut contribution margin approaches to determine Edger's current (1) sales revenue and (2) operating income Begin by computing the contribution margin ratio. (Enter the result as a whole number.) The contribution margin ratio is Enter any number in the edit fields and then click Check Answer. part remaining Clear All Check Answer

Explanation / Answer

Break even sales

= Fixed costs / Contribution margin ratio

So, $40,000 = $30,000 / Contribution margin ratio

So, Contribution margin ratio = $30,000 / , $40,000

= 0.75 or 75%

Now, Variable cost ratio = 1 – Contribution margin ratio

So, Variable cost ratio = 1 – 0.75

= 0.25 or 25%

So, Sales = Variable costs / Variable cost ratio

= $40,000 / 25%

= $160,000

So, Operating Income

= Sales – Variable costs –Fixed costs

= $160,000 - $40,000 - $30,000

= $90,000

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