There is excitement in the air! The new UltraGuard flea collar is about to be in

Question

There is excitement in the air! The new UltraGuard flea collar is about to be introduced to the market. The collar will feature enhanced protection, increased longevity and is environmentally friendly. It will be priced at $9.70 and has unit variable costs of $3.90. The company expects to sell 49,500 UltraGuard collars during the next six months. Some of the sales will come at the expense of the current product, the PetArmor collar, priced at $6.45 with variable costs of $3.10. The market analyst estimates that the UltraGuard collar will cannibalize 19,350 PetArmor collars during the introductory 6 month period.

Calculate the change in total contribution margin for the introductory six month period.

Explanation / Answer

S = Selling price per unit

V = Variable cost per unit

F = Total fixed costs

Q = Quantity of units produced and sold

Thus

Profit=Total salesTotal variable costsTotal fixed costs=(S×Q)(V×Q)F

The contribution margin income statement starts with sales, deducts variable costs to determine the contribution margin, and deducts fixed costs to arrive at profit. We use the term “variable cost” because it describes a cost that varies in total with changes in volume of activity. We use the term “fixed cost” because it describes a cost that is fixed (does not change) in total with changes in volume of activity.

Contribution Margin Ratio

The contribution margin ratio (often called contribution margin percent) is the contribution margin as a percentage of sales. It measures the amount each sales dollar contributes to

(1) covering fixed costs and

(2) increasing profit.

The contribution margin ratio is the contribution margin per unit divided by the selling price per unit. (Note that the contribution margin ratio can also be calculated using the total contribution margin and total sales; the result is the same.

Contribution margin ratio = (S V) ÷ S

The formula to find the break-even point in sales dollars is

Break-even point in sales dollars=Total fixed costs + Target profit /contribution margin ratio

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