Cheng & Co. grows and sells mandarin oranges . The monthly income statement of Cheng &

Co for month ended 31 December 2022 is as follows:

Number of cases

4,000

Revenue

$400,000

Costs:

Wages for manual labourers

$200,000

Packing materials

$40,000

Rental of land

$40,000

Administration and selling

$50,000

Inspection wages

$10,000

$340,000

Operating income

$60,000

Manual labourers and inspectors are employed on an hourly basis and can be laid off

whenever necessary. Packing materials vary according to the volume of production. Rental of

land administration and selling are all fixed and unaffected by the volume of production.

Required:

a) Prepare an income statement by using the contribution income format for month ended 31

December 2022.

b) For the month of December 2022 , what is the current margin of safety in sales dollars and

unit number of cases?

c) Explain the significance of a low margin safety to the business?

d) The manager believes that he will face some cost increases in 2023, he plans to increase

the wage rate for manual labourers and inspectors by 10%.

The supplier of packing materials has informed him that the price of packing materials

will go up by 5% from the beginning of 2023. Monthly administrative and selling is

expected to go up to $72,000. Monthly land rent will remain the same as in 2022.

Assume that the demand will still be at 4,000 cases per month for 2023; the manager

intends to pass all the cost increases to customers by raising the price per case. Compute

the new price to be charged in 2023 in order for the company to earn the same monthly

operating income as in December 2022.

e) Management would like to target for a contribution margin of 40%. What does a

products contribution margin ratio of 40% mean? Why is this ratio useful in planning

business operations?