Juicy Beauty manufactures and sells a face cream to small specialty stores in the greater Los Angeles area. It presents the monthly operating income statement shown here to George Lopez, a potential investor in the business. Help Mr. Lopez understand Juicy Beauty's cost structure. Juicy Beauty Operating Income Statement, June 2017
Units sold 20,000
Revenues $200,000
Cost of goods sold:
Variable manufacturing costs $110,000
Fixed manufacturing costs 40,000
Total 150,000
Gross margin 50,000
Operating costs:
Variable marketing costs $10,000
Fixed marketing and administrative costs 20,000
Total operating costs 30,000
Operating income $20,000
1. Recast the income statement to emphasize contribution margin.
2. Calculate the contribution margin percentage and breakeven point in units and revenues for June 2017.
3. What is the margin of safety (in units) for June 2017?
4. If sales in June were only 16,000 units and Juicy's tax rate is 30%, calculate its net income.

Juicy Beauty and George Lopez

Juicy Beauty's Cost Structure:

1. Juicy Beauty's Contribution Income Statement, June 2017

Units sold 20,000

Revenues                                                       $200,000

Variable Cost:

Variable manufacturing costs      $110,000

Variable marketing costs              $10,000

Total Variable Cost                                          120,000

Contribution                                                    $80,000

Fixed costs:

Fixed manufacturing costs             40,000

Fixed marketing & admin costs     20,000

Total Fixed costs                                              60,000

Operating income                                         $20,000

2a) Contribution Margin Percentage = $80,000/$200,000 x 100 = 40%

2b) Breakeven point in units and revenue:

To breakeven, total costs = total revenue

Breakeven point in units = Fixed Cost/Contribution per unit = $60,000/$4 = 15,000 units

Breakeven point in revenue = Fixed Cost/Contribution margin ratio = $60,000/40% = $150,000

3. Margin of Safety = (Sales - Break-even revenue)/Sales x 100 = ($200,000 - $150,000)/$200,000 x 100 = $50,000/$200,000 x 100 = 25%

4. Calculation of Net Income with sales of 16,000 units and Tax of 30%:

Sales                $160,000

Variable cost      96,000

Contribution    $64,000

Fixed Cost         60,000

Pretax Income   $4,000

Tax                       1,200

Net Income      $2,800

Explanation:

a) Juicy Beauty Operating Income Statement, June 2017

Units sold 20,000

Revenues                                                       $200,000

Cost of goods sold:

Variable manufacturing costs      $110,000

Fixed manufacturing costs             40,000

Total                                                                  150,000

Gross margin                                                   $50,000

Operating costs:

Variable marketing costs              $10,000

Fixed marketing & admin costs     20,000

Total operating costs                                       30,000

Operating income                                         $20,000

b) Financial accounting prepares the income statement differently from the way that cost and management accounting prepare the income statement.  Financial accounting emphasizes gross profit - using absorption costing technique.  Management accounting focuses on contribution using variable costing.  In variable costing, costs are identified according to their behaviors.

c) The breakeven point is the level of production at which the costs of production equal the revenues for a product.  This means that there is no profit.

d) The contribution margin ratio is the ratio of contribution margin to the sales.  It is expressed in percentage.

e) The margin of safety is the ratio of the difference between sales revenue and breakeven revenue over the sales revenue.  It is expressed in percentage.

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