Nottingham News Company has the rights to sell and deliver the city newspaper in

Question

Nottingham News Company has the rights to sell and deliver the city newspaper in a designated area in the country. A monthly subscription sells for $30.00 and Nottingham News pays $10.00 per month for each newspaper subscription. In addition to this variable cost, Nottingham News has fixed costs of $3,000 per month. Nottingham News currently activity level is 700 subscriptions.
1. Calculate the contribution margin ratio and explain the ratio as it pertains to Nottingham News Company.

2. Use the mathematical formula to calculate Nottingham News’ monthly breakeven point in units (number of subscriptions).

3. Use the shortcut contribution margin approach to calculate Nottingham News’ monthly breakeven in units (number of subscriptions).

4. Prove the breakeven point by preparing a contribution margin income statement.

5. Use the contribution margin ratio, which you calculated in number one to compute Nottingham News’ breakeven point in sales dollars.

6. Calculate the margin of safety ratio and explain the ratio as it pertains to Nottingham News Company.

7. The owner of Nottingham News’ wants to earn a $10,000 profit per month. Calculate the sales volume in units (number of subscriptions) and sales dollars required to achieve this level of profit.

Explanation / Answer

1.Monthly subscription $30 Variable expenses $10 Contribution per subscription $20 Contribution margin ratio Contributionmargin/sales*100 Contribution margin ratio=20/30*100 66.67% 2.Break even point in units Fixed cost/Contrituion margin Fixed cost $3,000 contribution margin per subscription $20 Break even point of subscription 3000/20 150 subscriptions 3` 2.Break even point in units Fixed cost/Contrituion margin Fixed cost $3,000 contribution margin per subscription $20 Break even point of subscription 3000/20 150 subscriptions 4 contribution margin income statement sales   700*30 $21,000 Less: Variable expenses 700*$10 $7,000 contribution margin $14,000 Less: Fixed expeses $3,000 Net income $11,000 5.Break even point in sales dollars Fixed costs $3,000 Contribution margin $20 Selling price $30 Break evenpoint in dollars=Fixed cost/contribution*sales Break evenpoint in dollars=3000/20*30 $4,500 6. Margin of safety ratio Actual sales-breakevensales/actual sales*100 Margin of safety ratio=21000-4500/21000*100=78.5% 7. The owner wants to earn a profit of $10,000 Break even point in unit Fixed cost+desired profit/contribution margin 3000+10000/20 650 subscriptions Break even sales in dollars=650*30 $19,500

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