Question

230 CHAPTER 4 Check sum: Weighted average contribution margin/unit is $1.25. P4-67A Conduct a CVP analysis of a multiproduct firm (Learning Objectives 4 & 5) The contribution margin income statement of Extreme Coffee for February is as follows. Extreme Coffee sells three small coffees for every large coffee. A small coffee sells for $2 with a variable expense of $1. A large coffee sells for $4 with a variable expense of $2. EXTREME COFFEE Contribution Margin Income Statement For the Month Ended February 29 Sales revenue...................................................................... $90,000 Variable expenses: Cost of goods sold............................................................. $32,000 Marketing expense.............................................................. 10,000 General and administrative expense.......................................... 3,000 Contribution margin.............................................................. 45,000 45,000 Fixed expenses: Marketing expense.............................................................. 16,500 General and administrative expense.......................................... 3,500 Operating income................................................................ $25,000 20,000 Requirements 1. Determine Extreme Coffee's monthly break-even point in the numbers of small cof- fees and large coffees. Prove your answer by preparing a summary contribution mar- gin income statement at the break-even level of sales. Show only two categories of expenses: variable and fixed. 2. Compute Extreme Coffee's margin of safety in dollars. 3. Use Extreme Coffee's operating leverage factor to determine its new operating income if sales volume increases 15%. Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged.

230 CHAPTER 4
Check sum: Weighted average
contribution margin/unit is $1.25.
P4-67A Conduct a CVP analysis of a multiproduct firm (Learning Objectives 4 & 5)
The contribution margin income statement of Extreme Coffee for February is as follows.
Extreme Coffee sells three small coffees for every large coffee. A small coffee sells for $2
with a variable expense of $1. A large coffee sells for $4 with a variable expense of $2.
EXTREME COFFEE
Contribution Margin Income Statement
For the Month Ended February 29
Sales revenue...................................................................... $90,000
Variable expenses:
Cost of goods sold............................................................. $32,000
Marketing expense.............................................................. 10,000
General and administrative expense.......................................... 3,000
Contribution margin.............................................................. 45,000
45,000
Fixed expenses:
Marketing expense.............................................................. 16,500
General and administrative expense.......................................... 3,500
Operating income................................................................ $25,000
20,000
Requirements
1. Determine Extreme Coffee's monthly break-even point in the numbers of small cof-
fees and large coffees. Prove your answer by preparing a summary contribution mar-
gin income statement at the break-even level of sales. Show only two categories of
expenses: variable and fixed.
2. Compute Extreme Coffee's margin of safety in dollars.
3. Use Extreme Coffee's operating leverage factor to determine its new operating income
if sales volume increases 15%. Prove your results using the contribution margin income
statement format. Assume that sales mix remains unchanged.

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