Contribution margin is a financial metric that represents the portion of sales revenue remaining after subtracting variable costs directly associated with the production or delivery of goods or services. It is the amount available to contribute towards covering fixed costs and generating a profit. In other words, contribution margin is the per-unit or percentage contribution of each sale towards covering fixed costs and generating profit.

Explanation:

a. To calculate the annual operating income before tax, we need to subtract the net profit from the fixed costs: Annual operating income = Net profit - Fixed costs Annual operating income = $257,000 - $175,000 Annual operating income = $82,000

b. The breakeven sales level in dollars is the point at which the Espresso Coffee Bar's revenue covers all costs, resulting in zero operating income. To calculate the breakeven sales level, we need to divide the fixed costs by the contribution margin. Contribution margin = 1 - (Beverage and Food Cost + Other Variable Costs) Contribution margin = 1 - (0.28 + 0.38) Contribution margin = 1 - 0.66 Contribution margin = 0.34

Breakeven sales level = Fixed costs / Contribution margin Breakeven sales level = $175,000 / 0.34 Breakeven sales level $514,706

c. To determine the increase in sales revenue required to cover the manager's salary increase and maintain the current level of operating income, we need to calculate the contribution margin and use it in the following formula: Sales increase = (Salary increase / Contribution margin)

Contribution margin = 1 - (Beverage and Food Cost + Other Variable Costs) Contribution margin = 1 - (0.28 + 0.38) Contribution margin = 1 - 0.66 Contribution margin = 0.34

Sales increase = ($12,000 / 0.34) Sales increase $35,294

Therefore, sales revenue would need to increase by approximately $35,294 to cover the manager's salary increase and maintain the current level of operating income.

d. Contribution margin is a financial metric that represents the portion of sales revenue remaining after subtracting variable costs directly associated with the production or delivery of goods or services. It is the amount available to contribute towards covering fixed costs and generating a profit. In other words, contribution margin is the per-unit or percentage contribution of each sale towards covering fixed costs and generating profit.

Solve parts a, b, and c using two of the following three methods:

1. Graphical Method. Show the points on the graph.
2. Contribution Margin method using bottoms up and the "magic pair - % and dollar amount".