Part-I (Question 1)

The Best Team Inc;

Contribution Margin Ration for each line of Product
Shoes Watches Shorts Jackets
$ $ $ $
Total Sales 2,400,000 200,000 600,000 800,000
Less: Variable Cost 1,200,000 40,000 360,000 240,000
Contribution Margin 1,200,000 160,000 240,000 560,000
Contribution Margin Ratio 50% 80% 40% 70%

Working: Contribution Margin Per Unit Shoes Watches Shorts Jackets

$ $ $ $
Sales Price 50 200 25 250
Variable cost & expenses 25 40 15 75
Contribution Margin 25 160 10 175

Working: No of Units sold Shoes Watches Shorts Jackets

Percentage of Total Sales 60% 5% 15% 20%
Total Sales ($4,000,000) 2,400,000 200,000 600,000 800,000
Sales Price per unit 50 200 25 250
Number of Units Sold 48,000 1,000 24,000 3,200
Per unit Varable Cost 25 40 15 75
Total Variable Cost 1,200,000 40,000 360,000 240,000

Working: Contribution margin ratio Shoes Watches Shorts Jackets

Total Sales 2,400,000 200,000 600,000 800,000
Total Varaibel Cost 1,200,000 40,000 360,000 240,000
Contribution Margin 1,200,000 160,000 240,000 560,000
Contribution Margin Ratio 50 80 40 70

Part-I (Question 2) Shoes Watches Shorts Jackets

$ $ $ $
Total Sales 2,400,000 200,000 600,000 800,000
Less: Variable Cost 1,200,000 40,000 360,000 240,000
Contribution Margin
Contribution Margin Ratio

Part-I (Question 3) Shoes Watches Shorts Jackets

 $ $ $ $
Total Sales 2,400,000 200,000 600,000 800,000
Less: Variable Cost 1,200,000 40,000 360,000 240,000
Contribution Margin
Less: Fixed Costs & expenses
Operating Income

Part-I (Question 4) Shoes Watches Shorts Jackets

$ $ $ $
Total Sales 1,200,000 100,000 300,000 400,000
Less: Variable Cost 600,000 20,000 180,000 120,000
Contribution Margin
Less: Fixed Costs & expenses
Operating Income

Working: No of Units sold Shoes Watches Shorts Jackets

Percentage of Total Sales 60% 5% 15% 20%
Total Sales ($4,000,000) 1,200,000 100,000 300,000 400,000
Sales Price per unit 50 200 25 250
Number of Units Sold 24,000 500 12,000 1,600
Per unit Varable Cost 25 40 15 75
Total Varaibel Cost 600,000 20,000 180,000 120,000

Part-I (Question 5)
Break Even Sales volume in dollar = Fixec Cost / CM Ratio
C/M Ration = Contribution Margin/ Sales $1,080,000 = 54%
$2,000,000
BEP (in $) = $800,000/54% = $1,481,481

Check: $
Sales 1,481,481
Less: Variable Cost (46%) 681,481
Contribution Margin 800,000
Less: Fixed Cost 800,000
Operating Income (0)

Part-I (Question 6)
Margin of Safety: Actual Sales - Break Even Sales
Actual Sales
Break Even Sales volume in dollar = Fixec Cost / CM Ratio
C/M Ration = Contribution Margin/ Sales $2,160,000 = 54%
$4,000,000
BEP (in $) = $800,000/54% = $1,481,481

Actual Sales 4,000,000

Less: Break-Even sales 1,481,481
Margin of Safety 2,518,519
M/S % 63%

Part-I (Question 7) $
Total Sales 4,000,000
Less: Variable Cost 1,840,000
Contribution Margin 2,160,000
Contribution Margin % 54%

BEP (in $) = $540,000/54% = $1,000,000

In case fixed cost is reduced from $800,000 to $540,000 the BE sales will also reduce from $1,481,481
to $1,000,000

Check: $
Sales 1,000,000
Less: Variable Cost (46%) 460,000
Contribution Margin 540,000
Less: Fixed Cost 540,000
Operating Income -

Part-I (Question 8) Shoes Watches Shorts Jackets

$ $ $ $
Total Sales 2,400,000 200,000 600,000 800,000
Less: Variable Cost 1,200,000 40,000 360,000 240,000
Contribution Margin
Less: Fixed Costs & expenses
Operating Income
The reduction in fixed cost of $260,000 would contribute to increase in operating income with the same amount.

Part-I (Question 9) $
New Sales Volume= (Fixed Cost+Desired Income)/CM Ratio
($800,000+2,500,000)/54%
$ 6,111,111
Check:
Sales 6,111,111
Less: Variable Cost (46%) 2,811,111
Contribution Margin 3,300,000
Less: Fixed Cost 800,000
Operating Income 2,500,000

Part-I (Question 10)

Ranking in terms of C/M % Watches Jackets Shoes Shorts
C/M % 80% 70% 50% 40%
Units to be replaced in priority order 48,000 24,000 3,200 1,000
$ $ $ $
Sales 9,600,000 6,000,000 160,000 25,000
Variable Cotribution 1,920,000 1,800,000 80,000 15,000
Contribution Margin 7,680,000 4,200,000 80,000 10,000
Fixed Cost
Operating Inocme
The product that yield a large total dollar contribution towards recovering the fixed cost should be produced
more than the one which yield lower contribution provided capacity constrints are not there.
In the above calculation a shift in sales mix according to the C/M % has produced a large operating income
of $11,160,000 against the orginal operating income of $1,360,000
Total
$
4,000,000
1,840,000
2,160,000
54%

Total
 $
4,000,000
1,840,000
2,160,000
800,000
1,360,000

Total
$
2,000,000
920,000
1,080,000
800,000
280,000
 Total
$
4,000,000
1,840,000
2,160,000
540,000
1,620,000
th the same amount.
 Total

76,200
$
15,785,000
3,815,000
11,970,000
800,000
11,170,000
ould be produced

erating income
Part-II (Question 11)
The Best Team Inc;
Contribution Margin Ration for each line of Product
Shoes Watches Shorts Jackets
$ $ $ $
Total Sales 1,600,000 400,000 400,000 1,600,000
Less: Variable Cost 800,000 80,000 240,000 480,000
Contribution Margin 800,000 320,000 160,000 1,120,000
Contribution Margin Ratio

Working: C/M Per Unit Shoes Watches Shorts Jackets

$ $ $ $
Sales Price 50 200 25 250
Variable cost & expenses 25 40 15 75
Contribution Margin 25 160 10 175

Working: No of Units sold Shoes Watches Shorts Jackets

Percentage of Total Sales 40% 10% 10% 40%
Total Sales ($4,000,000) 1,600,000 400,000 400,000 1,600,000
Sales Price per unit 50 200 25 250
Number of Units Sold 32,000 2,000 16,000 6,400
Per unit Varable Cost 25 40 15 75
Total Varaibel Cost 800,000 80,000 240,000 480,000

Working: C/M Ratio Shoes Watches Shorts Jackets

Total Sales 1,600,000 400,000 400,000 1,600,000
Total Varaibel Cost 800,000 80,000 240,000 480,000
Contribution Margin 800,000 320,000 160,000 1,120,000
Contribution Margin Ratio 50% 80% 40% 70%

Monthly Operating Income

Part-II (Question 12) Shoes Watches Shorts Jackets
$ $ $ $
Total Sales 1,600,000 400,000 400,000 1,600,000
Less: Variable Cost 800,000 80,000 240,000 480,000
Contribution Margin
Less: Fixed Cost
Operating Income

Part-II (Question 13)

Break Even Sales volume in dollar = Fixec Cost / CM Ratio
C/M Ratio = Contribution Margin/ Sales $2,400,000 = 60%
$4,000,000
BEP (in $) = $800,000/60% = $1,333,333

Check: $
Sales 1,333,333
Less: Variable Cost (40%) 533,333
Contribution Margin 800,000
Less: Fixed Cost 800,000
Operating Income (0)

Financial Picture after change of Sales Mix

Part-II (Question 14) Shoes Watches Shorts Jackets
Units sold after change of sales mix 32000 2000 16000 6400
Units sold in original sales mix 48,000 1,000 24,000 3,200
Difference (16,000) 1,000 (8,000) 3,200
Contribution per unit 25 160 10 175
Increase/(Decrease) in C/M ($) (400,000) 160,000 (80,000) 560,000
The above calculation shows that Contribution Margin increased by $240,000 due to change in sales mix.
Per unit contribution of Jackets and Watches was higher than shoes and shorts. By increasing higher sales
of these units in the new sales mix yielded higher contribution by $240,000.

Impact of reduction of VC on Operating Income

Part-II (Question 15) Shoes Watches Shorts Jackets
$ $ $ $
Total Sales 1,600,000 400,000 400,000 1,600,000
Less: Variable Cost 720,000 72,000 216,000 432,000
Contribution Margin
Less: Fixed Cost
Operating Income
Original operating Income
Increase in Operating Income
Percentage Increase
Yes the above calculation proves that decrease in Variable cost by 10% results into increase in Operating
income by the same percentage.

Working- Part II-(15) Shoes Watches Shorts Jackets

Sales Price per unit 50 200 25 250
Per unit Varable Cost 25 40 15 75
Decrease in cost by 10% 2.50 4.00 1.50 7.50
Revised per unit cost 22.50 36.00 13.50 67.50
Units Sold 32,000 2,000 16,000 6,400
Revised variable cost 720,000 72,000 216,000 432,000

Monthly Operating Income based on Revised sales price

Part-II (Question 16) Shoes Watches Shorts Jackets
$ $ $ $
Total Sales 1,600,000 280,000 400,000 1,120,000
Less: Variable Cost 800,000 80,000 240,000 480,000
Contribution Margin
Less: Fixed Cost
Operating Income
Break Even Sales volume in dollar = Fixec Cost / CM Ratio
C/M Ratio = Contribution Margin/ Sales $1,800,000 = 52.94%
$3,400,000
BEP (in $) = $1,200,000/52.94% = $2,266,667

Check: $
Sales 2,266,667
Less: Variable Cost (47.05882%) 1,066,667
Contribution Margin 1,200,000
Less: Fixed Cost 1,200,000
Operating Income 0

Working- Part II-(16) Shoes Watches Shorts Jackets

Sales Price per unit 50 200 25 250
suggested reduction 30% 0 60 - 75
Revised Sales Price 50 140 25 175
Units Sold 32,000 2,000 16,000 6,400
Revised Sales Revenues 1,600,000 280,000 400,000 1,120,000

Part-II (Question 17)

Break-Even Operating
Sales ($) Income ($)
Base Case 1,481,481 1,360,000
Result question 16 2,266,607 600,000
As a result of stiff competition the drop in prices of watches and jackets would reduce the
sales revenue by $600,000 and increase in fixed by $400,000 would result in overall
decrease in operating income of $1,000,000.
Reduction in sales and increase in fixed cost has enhanced the risk profile of the company.
 Total
$
4,000,000
1,600,000
2,400,000
60%

me
Total
$
4,000,000
1,600,000
2,400,000
800,000
1,600,000
Sales Mix
Total

240,000
ange in sales mix.
asing higher sales

ting Income
Total
$
4,000,000
1,440,000
2,560,000
800,000
1,760,000
1,600,000
160,000
10%
ase in Operating

vised sales price

Total
$
3,400,000
1,600,000
1,800,000
1,200,000
600,000

3,400,000