# Question

The contribution margin income statement of Extreme Coffee for February follows. Extreme Coffee sells three small coffees for every large coffee. A small coffee sells for $2, with a variable expense of $1. A large coffee sells for $4, with a variable expense of $2.

Requirements

1. Determine Extreme Coffee’s monthly break-even point in the numbers of small coffees and large coffees. Prove your answer by preparing a summary contribution margin income statement at the break-even level of sales. Show only two categories of expenses: variable and fixed.

2. Compute Extreme Coffee’s margin of safety in dollars.

3. Use Extreme Coffee’s operating leverage factor to determine its new operating income if sales volume increases 15%. Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged.

Requirements

1. Determine Extreme Coffee’s monthly break-even point in the numbers of small coffees and large coffees. Prove your answer by preparing a summary contribution margin income statement at the break-even level of sales. Show only two categories of expenses: variable and fixed.

2. Compute Extreme Coffee’s margin of safety in dollars.

3. Use Extreme Coffee’s operating leverage factor to determine its new operating income if sales volume increases 15%. Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged.

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