Alderman Dry Cleaners has determined the following about its costs: Total variab

Question

Alderman Dry Cleaners has determined the following about its costs: Total variable expenses are $40,000, total fixed expenses are $30,000, and the sales revenue needed to break even is $40,000. Determine the company's current 1) sales reveed2) operating income. (Hint: First, find the contribution margin ratio; then prepare the contribution margin income statement) Use the contribution margin income statement and the shortcut contribution margin approaches to determine Alderman's current (1) sales revenue and (2) operating income. Begin by computing the contribution margin ratio. (Enter the result as a whole number.) The contribution margin ratio is

Explanation / Answer

Breakeven Sales

= Fixed costs / Contribution margin ratio

So, $40,000

= $30,000 / Contribution margin ratio

So, Contribution margin ratio

= $30,000 / $40,000

= 0.75 or 75%

So, Variable cost ratio

= 1 - Contribution margin ratio

= 1 – 0.75

= 0.25

Now, Variable expenses = $40,000

So, Sales x Variable cost ratio = Variable expenses

So, Sales x 0.25 = $40,000

So, Sales = $40,000 / 0.25

= $ 160,000

Operating Income

= Sales – Variable costs – Fixed costs

= $160,000 - $40,000 - $30,000

= $ 90,000

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