Problem #2 The following income statement refers to 2014 performance: Sales                                                                            $5,000,000 Cost of Goods Sold                                                    $3,500,000 Gross Margin                                                              $1,500,000 Selling, General, and Administrative Expenses           $1,100,000 Operating Income                                                       $   400,000 If Cost of Goods Sold had no fixed costs, but Selling, General and Administrative Expenses included $60,000 in commissions and $140,000 in other variable costs related to sales volume: What was the Contribution Margin for 2014? What was the Contribution Margin Percentage for 2014? If sales are expected to increase by 10% in 2015, what is the expected operating income for 2015? What are break-even sales for 2015? Solution Hi, Please find the detailed answer as follows: Part A: Contribution Margin = Sales - Variable Costs = 5000000 - 3500000 - 60000 - 140000 = $1300000 ----- Part B: Contribution Margin % = Contribution Margin/Sales*100 = 1300000/5000000*100 = 26% ------- Part C: Expected Operating Income = Revised Sales - Revised Variable Costs - Fixed Costs Revised Sales = 5000000*(1+.10) = 5500000 Revised Variable Costs = (3500000 + 60000 + 140000)*5500000/5000000 = 4070000 Expected Operating Income = 5500000 - 4070000 - (1100000 - 60000 - 140000) = $530000 -------- Part D: Break Even Sales = Fixed Cost/Contribution Margin % Revised Contribution Margin = 5500000 - 4070000 = 1430000 Revised Contribution Margin % = 1430000/5500000 = 26% Break Even Sales = (1100000 - 60000 - 140000)/26% = $3461538.46 Thanks. .

1. Problem #2
The following income statement refers to 2014 performance:
Sales                                     Â
                                    Â
$5,000,000
Cost of Goods Sold  Â
                                       Â
       $3,500,000
Gross
Margin                                    Â
                        $1,500,000
Selling, General, and Administrative Expenses          $1,100,000
Operating
Income                                    Â
                 $  400,000
If Cost of Goods Sold had no fixed costs, but Selling, General and Administrative Expenses
included $60,000 in commissions and $140,000 in other variable costs related to sales volume:
What was the Contribution Margin for 2014?
What was the Contribution Margin Percentage for 2014?
If sales are expected to increase by 10% in 2015, what is the expected operating income for
2015?
What are break-even sales for 2015?
Solution

2. Hi,
Please find the detailed answer as follows:
Part A:
Contribution Margin = Sales - Variable Costs = 5000000 - 3500000 - 60000 - 140000 =
$1300000
-----
Part B:
Contribution Margin % = Contribution Margin/Sales*100 = 1300000/5000000*100 = 26%
-------
Part C:
Expected Operating Income = Revised Sales - Revised Variable Costs - Fixed Costs
Revised Sales = 5000000*(1+.10) = 5500000
Revised Variable Costs = (3500000 + 60000 + 140000)*5500000/5000000 = 4070000
Expected Operating Income = 5500000 - 4070000 - (1100000 - 60000 - 140000) = $530000
--------
Part D:
Break Even Sales = Fixed Cost/Contribution Margin %
Revised Contribution Margin = 5500000 - 4070000 = 1430000
Revised Contribution Margin % = 1430000/5500000 = 26%
Break Even Sales = (1100000 - 60000 - 140000)/26% = $3461538.46
Thanks.