Presented here is the income statement for Big Surf, Inc., for the month of May:

Question

Presented here is the income statement for Big Surf, Inc., for the month of May: Sales Cost of goods sold $62,000 50,400 Gross profit Operating expenses $11,600 3,700 Operating loss S (2,100) Based on an analysis of cost behavior patterns, it has been determined that the company's contribution margin ratio is 16%. Required: a Rearrange the preceding income statement to the contribution margin format. Sales Variable expenses Contribution margin Fixed expenses Operating loss 62,000 62,000 62,000 f sales increase by 10%, what will be the firm's operating income (or loss)? (Round your answer to the nearest whole dollar.)

Explanation / Answer

a) Income statement of the Big Surf Inc., for the month of May $ Sales 62000 Variable expenses (62000*84%) 52080 Contribution margin (62000*16%) 9920 ( Sales*contribution margin ratio) Cost of goods sold 50400 Operating expenses 13700 Toatal expenses 64100 Less: Variable expenses 52080 Fixed expenses 12020 Operating loss             (2,100) b) computation of operating income (or loss) if sales is increased by 10% $ Revised Sales (62000*1.1) 68200 Variable expenses (52080*1.1) 57288 Contribution margin 10912 Fixed expenses 12020 Operating loss             (1,108) Note: 1. Here it is assumed that the increase in sales is the result of increase in number of units sold, since the variable expenses also will vary propotionatly. 2. Fixed expenses will remain same at all levels of sales. Breake even sales of Big Surf,Inc.,= Fixed expenses/contribution margin ratio = 12020/16% = $75,125

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