After researching and talking it over with some of my colleagues I decided that the variable cost and material cost had to be one entity. Please correct me if I’m wrong because this was really difficult for me. The contribution margin rations were calculated using the equation provided by the text. The contribution margin ratio can be calculated by subtracting the variable price per unit from the selling price per unit and then dividing that number by the selling price per unit.
This gave me the contribution margin ratio which is expressed as a percent.
This percent was then subtracted from 100 and that number was multiplied by the total sales revenue to compute the total variable cost. The updated numbers given in the text are reflected in the next chart. 35,000 $4. 00 50% 35,000 x 14 = 490,000 490,000 x . 50 245,000 540,000 x . 33 = 178,200 Both of these changes actually in computer stock and place mats made the overall total sales revenue increase substantially, even though their contribution margin ratios decreased. Herbert concern about the specialty printing of the place mats should definitely be a concern.
The fixed costs of the place mats seem to be making it harder for the company to reach the break- even point so that they can start to make a profit or return on the products that are being offered from their product lines. Fifth Mendel Paper Company was to discontinue the specialty printing of the place mats then the company could reduce their high fixed cost and high variable cost drastically. In decreasing these two components of the cost- volume – profit analysis a company could reach heir break- even point much quicker which could in turn allow them time and room for an even greater profit.
The next chart sets the stage for calculating the break -even point as well as the margin of safety for the estimated sales volume. Product Lines Sales Volume Selling Price Unit Variable Cost Dollars Ratio 70% 71% Totals 275,000 This table just reorganized the computations from the previous tables to prepare me to actually start to the calculations for finding the break-even point in the next table. Product Lines Sales Mix Proportions Contribution Margin Per Unit Weighted Contribution Margin 1% . 88 44 % 1. 0 1. 34 29% 1. 74 $5. 06 This is where I got confused. I really tried to use the example given in the book and even looked at the numbers posted to try and figure out how those numbers were computed but it just did not make sense to me. I understood how the next table should be set up to calculate the actual break-even point and the margin of safety for each but I did not know where to find my numbers because in the example I could not figure out where they got the 222,222 to compute their break-even point.
I understand the basic concepts introduced here but t this point am not very confident about how I am going to perform in this course being that I already feel completely lost in the beginning. These are my calculations and as stated in the guidance I may not have gotten the correct calculations but it will give me some hope if my thought process is on the right track with how to calculate the different margin ratios.
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