Q41PGA
ExpertverifiedThe contribution margin income statement of Sugar Lips Donuts for August 2018 follows:
Sugar Lips sells three dozen plain donuts for every dozen custardfilled donuts. A dozen plain donuts sells for $4.00, with total variable cost of $1.80 per dozen. A dozen custardfilled donuts sells for $8.00, with total variable cost of $3.60 per dozen.
Requirements
1. Calculate the weightedaverage contribution margin.
2. Determine Sugar Lips’s monthly breakeven point in dozens of plain donuts and custardfilled donuts. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.
3. Compute Sugar Lips’s margin of safety in dollars for August 2018.
4. Compute the degree of operating leverage for Sugar Lips Donuts. Estimate the new operating income if total sales increase by 30%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar. Assume the sales mix remains unchanged.)
5. Prove your answer to Requirement 4 by preparing a contribution margin income statement with a 30% increase in total sales. (The sales mix remains unchanged.)
 Plain donuts  Custard filled donuts  Total 
Selling price  $4  $8 

Variable cost  $1.80  $3.60 

Contribution per unit  $2.2  $4.4 

Sales mix  X 3  X 1  4 
Total contribution  $6.6  $4.4  $11 
Weighted average contribution margin 

 $2.75 
Contribution margin income statement
Net sales revenue (9,000 x $4)+($3,000x$8)  $60,000 
Variable cost (9,000 x $1.80)+($3,000x$8)  $27,000 
Contribution Margin  $33,000 
Fixed cost  $33,000 
Operating income  $0 
Net sales revenue (125,000 x (1+30%)  $162,500 
Variable cost ($56,250 x (1+30%)  $73,125 
Contribution margin  $89,375 
Fixed costs  $33,000 
Operating income  $56,375 
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