Case Study Chapter 6

Case Study Chapter 6

ACC/349 Cost Accounting

Case Study Chapter 6

This week, Custom Coatings contacted our team to analyze the data that they have provided and make some recommendations. With this in mind, the analyzed the contribution margin, the break-even point in sales dollars, the margin of safety, and the operating leverage. The following information will be reported back to the company.

a) Compute and interpret the contribution margin ratio under each approach.

To figure the Contribution Margin Ratio, you will divide the Contribution Margin per Unit by the Sales Price per Unit.  Custom Coating's contribution margin is 800,000 with the current approach, and the sales price is 2,000,000. Therefore, the contribution margin ratio under the current approach is 40%

800,000 / 2,000,000 = .40 or 40%

Custom Coating's contribution margin is 1,600,000 with the current approach, and the sales price is 2,000,000. Therefore, the contribution margin ratio under the current approach is 80%

1,600,000 / 2,000,000 = .80 or 80%

The contribution margin ratio tells the managers how much of the sales are available to cover the monthly fixed costs and expenses once the fixed costs and expenses are covered the remainder will flow into the company's net income.  So in this case, 40% of the sales would cover the monthly fixed costs and expenses while 60% will flow into the company's net income under the current approach.  For the automated approach 80% if the sales would be needed to cover the monthly fixed costs and expenses while 20% will flow into the company's net income.

b) Compute the break-even point in sales dollars under each approach.

To figure the break-even point in sales under the current approach, you would take the fixed cost of $200,000 and divide that by the contribution margin ratio for the current approach (calculate in (a) of .40).

200,000 /.40 = $500,000

To figure the break-even point in sales under the automated approach, you would take the...