Contribution Margin Concepts

Problem

DiPinto Electric Guitars & Basses sells musical instruments in Philadelphia. Assume the following information comes from the company's prior year records.

FixedVariableTotal

Sales ............................................................$800,000

Costs

Goods sold............................................. $346,000

Labor......................................................$180,00040,000

Supplies.................................................10,0004,000

Utilities...................................................9,0005,000

Rent.......................................................48,000- - - - - - -

Advertising...........................................10,000- - - - - - -

Miscellaneous........................................10,0005,000

Total Costs............................................. $267,000$400,000(667,000)

Net Income ..............................................$133,000

Required

a. Determine the annual break-even dollar sales volume.

b. Determine the current margin of safety in dollars.

c. Prepare a cost-volume-profit graph for the guitar shop. Label both axes in dollars with maximum values of $1,000,000. Draw a vertical line on the graph for the current ($800,000) sales level, and label total variable costs, total fixed costs, and total profits at $800,000 sales.

d. What is the annual break-even dollar sales volume if management makes a decision that increases fixed costs by $50,000?