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Juicy Beauty, a manufacturer of face creams, presents its operating income statement for June 2017 to potential investor George Lopez. In this report, we will help Mr. Lopez understand Juicy Beauty's cost structure and provide insights into contribution margin, breakeven points, margin of safety, and net income calculations.
| Item | Amount |
|---|---|
| Units Sold | 20,000 |
| Revenues | $200,000 |
| Cost of Goods Sold | |
| Variable Manufacturing Costs | $110,000 |
| Fixed Manufacturing Costs | $40,000 |
| Total Manufacturing Costs | $150,000 |
| Gross Margin | $50,000 |
| Operating Costs | |
| Variable Marketing Costs | $10,000 |
| Fixed Marketing and Admin Costs | $20,000 |
| Total Operating Costs | $30,000 |
| Operating Income | $20,000 |
To emphasize the contribution margin, we recast the income statement as follows:
| Item | Amount |
|---|---|
| Units Sold | 20,000 |
| Revenues | $200,000 |
| Variable Costs | |
| Variable Manufacturing Costs | $110,000 |
| Variable Marketing Costs | $10,000 |
| Total Variable Costs | $120,000 |
| Contribution Margin | $80,000 |
| Fixed Costs | |
| Fixed Manufacturing Costs | $40,000 |
| Fixed Marketing and Admin Costs | $20,000 |
| Total Fixed Costs | $60,000 |
| Operating Income | $20,000 |
Let's calculate the contribution margin percentage and breakeven point:
Contribution Margin Percentage:
Contribution Margin Percentage = (Contribution Margin / Revenues) * 100
Contribution Margin Percentage = ($80,000 / $200,000) * 100 = 40%
Breakeven Point in Units:
Using the formula: Breakeven Point in Units = Fixed Costs / Contribution Margin per Unit
Contribution Margin per Unit = Contribution Margin / Units Sold
Contribution Margin per Unit = $80,000 / 20,000 units = $4,00 per unit
Breakeven Point in Units = $60,000 / $4,00 = 15,000 units
Breakeven Point in Revenues:
Using the formula: Breakeven Point in Revenues = Fixed Costs / Contribution Margin Percentage
Breakeven Point in Revenues = $60,000 / 40% = $150,000
The margin of safety is the difference between actual sales and breakeven sales.
In this case, the margin of safety in units is:
Margin of Safety (in units) = Current Sales Level in Units - Breakeven Point in Units
Margin of Safety (in units) = 20,000 units - 15,000 units = 5,000 units
If sales in June were only 16,000 units and the tax rate is 30%, we can calculate the net income as follows:
Contribution Margin:
Contribution Margin = Contribution Margin per Unit * Units Sold
Contribution Margin = $4,00 per unit * 16,000 units = $64,000
Operating Income:
Operating Income = Contribution Margin - Fixed Costs
Operating Income = $64,000 - $60,000 = $4,000
Tax Expense:
Tax Expense = Tax Rate * Operating Income
Tax Expense = 30% * $4,000 = $1,200
Net Income:
Net Income = Operating Income - Tax Expense
Net Income = $4,000 - $1,200 = $2,800
In conclusion, understanding the contribution margin and breakeven point is crucial for evaluating a company's cost structure and financial performance.
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Juicy Beauty's contribution margin percentage is 40%, and its breakeven point is 15,000 units or $150,000 in revenues. The margin of safety for June 2017 is 5,000 units.
If sales were only 16,000 units in June 2017, Juicy Beauty's net income, after accounting for a 30% tax rate, would be $2,800. Mr. Lopez can use this information to make informed investment decisions regarding Juicy Beauty.
Accounting Report: Understanding Cost Structure. (2024, Jan 24). Retrieved from https://studymoose.com/document/accounting-report-understanding-cost-structure
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