Case Study 7-55

Powerful Essays
Topics: Revenue, Sales
CASE 7-55:

1. Compute Niagra Falls Sporting Goods’ estimated break-even in sales dollars for the year ending December 31, 20x2, based on the budgeted income statement prepared by the controller.
Answer:
Contribution margin ratio = $10,000,000 - $6,000,000 - $2,000,000 / $10,000,000 = .20
Estimated break-even point = $100,000 / .20 = $500,000

2. Compute the estimated break-even point in sales dollars for the year ending December 31, 20x2, if the company employs its own sales personnel.
Answer:

New fixed expenses:
Previous fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,000
Full-time sales personnel salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Sales manager salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 350,000 New contribution margin ratio:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000,000
Commissions (5%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,500,000

Contribution margin ratio = $3,500,000 / $10,000,000 = .35
Estimated break-even point = $350,000 / .35

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