Q29E - Horngren'S Financial And Managerial Accounting

Question

Question: Gilbert’s Steel Parts produces parts for the automobile industry. The company has monthly fixed costs of \(640,220 and a contribution margin of 85% of revenues.

Requirements

1. Compute Gilbert’s monthly breakeven sales in dollars. Use the contribution margin ratio approach.

2. Use contribution margin income statements to compute Gilbert’s monthly operating income or operating loss if revenues are \)500,000 and if they are $1,050,000.

3. Do the results in Requirement 2 make sense given the breakeven sales you computed in Requirement 1? Explain.

Step-by-Step Solution

Answer

Answer

1. Breakeven sales is $753,200

2. The operating income/(Loss) at $500,000 sales level is ($215,220) and $252,280 at $1,050,000 sales.

3. Yes, it is relatable.

Step 1: Calculation of breakeven sales in dollars

$$\begin{gathered} \mathit{B}\mathit{r}\mathit{e}\mathit{a}\mathit{k}\mathit{e}\mathit{v}\mathit{e}\mathit{n}\mathbf{ }\mathit{s}\mathit{a}\mathit{l}\mathit{e}\mathit{s}\mathbf{ }\mathit{i}\mathit{n}\mathbf{ }\mathit{d}\mathit{o}\mathit{l}\mathit{l}\mathit{a}\mathit{r}\mathit{s}\mathbf{=}\frac{\mathbf{f}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{ }\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{ }\mathbf{t}}{\mathbf{C}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{r}\mathbf{i}\mathbf{b}\mathbf{u}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{ }\mathbf{m}\mathbf{a}\mathbf{r}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{ }\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{640}\mathbf{,}\mathbf{220}}{\mathbf{85}\mathbf{\%}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{753}\mathbf{,}\mathbf{200} \end{gathered}$$

Step 3: Contribution margin income statement

	When sales is	When sales is
	$500,000	$1,050,000
Sales	$500,000	$1,050,000
(-) Variable cost (15% of sales)	($75,000)	$1,050,000
Contribution Margin (85% of Sales)	$425,000	$892,500
(-) Fixed cost	($640,220)	($640,220)
Operating income/ (Loss)	($215,220)	$252,280

Step 3: Analysis

Yes, the results in requirement 2 does make sense given the breakeven sales of $753,200 in requirement 1 as it indicates sales below breakeven level is not profitable.