Berg Dry Cleaners has determined the following about its costs: Total variable expenses are $ 41 comma 000, total fixed expenses are $ 30 comma 000 comma and the sales revenue needed to break even is $ 50 comma 000. Determine the company's current 1) sales revenue and 2) operating income. (Hint: First, find the contribution margin ratio; then prepare the contribution margin income statement.) Use the contribution margin income statement and the shortcut contribution margin approaches to determine Berg's current (1) sales revenue and (2) operating income. Begin by computing the contribution margin ratio. (Enter the result as a whole number.) The contribution margin ratio is 18 %.

1. Sales revenue = $102.500

2. Net Income = $31,500

Explanation:

Requirement 1

We know,

Break-even sales = Fixed Expense ÷ Contribution Margin Ratio

Given,

Fixed Expense = $30,000

Contribution Margin Ratio = ?

Break-even sales (Sales revenue needed to break even) = $50,000

Putting the value into the above formula,

$50,000 = $30,000 ÷ Contribution Margin Ratio

or, $50,000 × Contribution Margin Ratio = $30,000

Therefore, Contribution Margin Ratio = $30,000 ÷ $50,000 = 0.60

Contribution Margin Ratio = 60% (As C.M. Ratio has to be a percentage)

Again,

Sales - Variable expense = Contribution Margin

If contribution Margin is 60%, then variable expense will be = (100% - 60%) = 40%.

Therefore, variable expense = $41,000. (That is 40% of sales)

Therefore, Variable expense ÷ Sales revenue = Variable expense ratio

or, Sales revenue = Variable expense ÷ Variable expense ratio

Sales revenue = $41,000 ÷ 40%

Hence, Sales revenue = $102.500

Requirement 2

                  Berg Dry Cleaners

Contribution Margin Income Statement

Sales Revenue (Requirement 1)      $102.500

Less: Variable expense                      (41,000)

Contribution Margin (60%)                   61,500

Less: Fixed expense                           (30,000)

Net operating Income                       $31,500

If the company sales in break even point, the contribution margin ratio = ($50,000 - 41,000) ÷ $50,000 = 0.18 = 18%. At that point, the net operating income is = 0.

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