Contribution margin, gross margin and margin of safety
Mirabella Cosmetics manufactures and sells a face cream to small ethnic stores in the greater New York area. It presents the monthly operating income statement shown here to George Lopez, a potential investor in the business. Help Mr. Lopez understand Mirabella's cost structure.
Required:
1. Recast the income statement to emphasize contribution margin.
2. Calculate the contribution margin percentage and breakeven point in units and revenues for June 2014.
3. What is the margin of safety (in units) for June 2014?
4. If sales in June were only 8,000 units and Mirabella's tax rate is 30%, calculate its net income.
1.
Mirabella Cosmetics
Operating Income Statement, June 2014
Units sold 10,000
Revenues $100,000
Variable costs
Variable manufacturing costs $ 55,000
Variable marketing costs 5,000
Total variable costs 60,000
Contribution margin 40,000
Fixed costs
Fixed manufacturing costs $ 20,000
Fixed marketing & administration costs 10,000
Total fixed costs 30,000
Operating income $ 10,000
2.
Contribution margin per unit =
Breakeven quantity =
Selling price =
Breakeven revenues = 7,500 units $10 per unit = $75,000
Alternatively,
Contribution margin percentage =
Breakeven revenues =
3. Margin of safety (in units) = Units sold – Breakeven quantity
= 10,000 units – 7,500 units = 2,500 units
4. Units sold 8,000
Revenues (Units sold Selling price = 8,000 $10) $80,000
Contribution margin (Revenues CM percentage = $80,000 40%) $32,000 Fixed costs 30,000
Operating income 2,000
Taxes (30% $2,000) 600
Net income $ 1,400
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