Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 78 cents per bottle. For the year 2014, management estimates the following revenues and costs. Sales $1,804,000 Selling expenses—variable $69,800
Direct materials 428,000 Selling expenses—fixed 65,800
Direct labor 354,000 Administrative expenses—variable 64,920
Manufacturing overhead—variable 310,000
Administrative expenses—fixed 64,900
Manufacturing overhead—fixed 288,000
a. Prepare a CVP income statement for 2014 based on management’s estimates.
b. Calculate variable cost per bottle. (Round variable cost per bottle to 2 decimal places, e. g. 0.25.)
c. Compute the break-even point in (1) units and (2) dollars. (Round answers to 0 decimal places, e. g. 1,225.)
d. Compute the contribution margin ratio and the margin of safety ratio. (Round variable cost per bottle to 2 decimal places, e. g. 0.25 and final answers to 0 decimal places, e. g. 25%.)
e. Determine the sales dollars required to earn net income of $240,852. (Round answer to 0 decimal places, e. g. 1,225.)

a. CVP income statement for 2014 based on management’s estimates.

Sales                                                                                 $1,804,000

Less Variable Costs :

Selling expenses—variable                         $69,800

Direct materials                                          $428,000

Direct labor                                                 $354,000

Administrative expenses—variable            $64,920

Manufacturing overhead—variable           $310,000   ($1,226,720)

Contribution                                                                       $577,280

Less Fixed Costs

Selling expenses—fixed                             $65,800

Administrative expenses—fixed                 $64,900

Manufacturing overhead—fixed               $288,000      ($418,700)

Net Income / (Loss)                                                           $158,580

b. $0.34

c. (1) 2,616,875 bottles and (2) $1,308,438

d. contribution margin ratio = 32 % and margin of safety ratio = 27 %

e. $2,061,100

Explanation:

Number of Units Sold = Total Revenue ÷ Selling Price per unit

                                    = $1,804,000 ÷ $0.50

                                    = 3,608,000 bottles

Variable Cost per bottle = Total Variable Costs ÷ Number of Units Sold

                                         = $1,226,720 ÷ 3,608,000

                                         = $0.34

Break-even point in (units) = Fixed Costs ÷ Contribution per unit

                                            = $418,700 ÷ ($0.50 - $0.34)

                                            = 2,616,875 bottles

Break-even point in (dollars) = Fixed Costs ÷ Contribution Margin Ratio

                                               = $418,700 ÷ ($0.16 / $0.50)

                                               = $1,308,438

Contribution Margin Ratio = Contribution / Sales × 100

                                           = ($0.50 - $0.34) / $0.50 × 100

                                           = 32 %

Margin of safety ratio = (Expected Sales - Break Even Sales) / Expected Sales × 100

                                   =  ($1,804,000 - $1,308,438) / $1,804,000 × 100

                                   =  27.470 OR 27 %

Sales to Reach Target Profit = (Target Profit + Fixed Costs) ÷ Contribution Margin Ratio

                                               = ($240,852 + $418,700) ÷ 0.32

                                               = $2,061,100

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