Financial Accounting the Contribution Margin

Financial Accounting

The contribution margin for Diego Motors is $26,000 - $22,000 - $500 = $3,500. The fixed monthly costs are $140,000. Therefore, the breakeven point is:

3500)(1-.4)(x) = 140,000; x = 140,000/(3500)(.6)

cars

The target monthly operating income is (140,000 + 63,000)/(0.6) = $338,333. To achieve this requires sales of 97 cars.

The contribution margin of Schmidt's Clothing is Revenues - COGS - Commission / Revenues; 250,000 / 500,000 = $250,000

The contribution margin percentage is COGS (40%) + Commission (10%) = 50%

Revenues increase by $100,000; COGS increases by $40,000; Commission increases by $10,000, other operating costs increases by $10,000. Therefore operating income increase by 100,000-40,000-10,000-10,000 = $40,000. This means that operating income is now $30,000.

The breakeven point calculated by the manager is incorrect. He assumes variable costs are on a per student basis. This is incorrect. Variable costs are on a per class basis. Their present income levels indicate 144 students; at 12 per class they have 12 classes with no extra space. Therefore, to accommodate 4 more students, they need to offer another class. So those four students would bring in £11,000 in revenue, but costs would increase £10,000. The contribution of the new students would be £1,000, so Scholarly would still operate at a loss. I would recommend that Scholarly view the issue of contribution on a per class basis rather than per student; then subordinate an analysis on a per student basis. This allows them to recognize that they not only need to add a 13th class, but that they need at least 7 students in that class in order to break even.

4)1. The NPV of the project is $36,438,244 and the IRR is 312%. Depreciation is not included in the calculation because it is not a cash flow. It impacts flows at the tax level, but the tax rate is not known so this impact could not be calculated.

2. During the sensitivity analysis, the discount rate proves to be irrelevant. Dramatic changes in the hurdle rate are barely reflected in the NPV. Changes in sales volumes have a greater impact, but ultimately sales volumes would need to fall dramatically short in order to impact the project's viability. Selling price is the most important variable. The project's high NPV derives primarily from its contribution margin, which is a gaudy 79%. If the company is not able to charge such a high markup on the new balls, the project's viability decreases dramatically. At $19, the project loses money. So therefore, the most important variable is the contribution margin, fed by the high selling price.