Nottingham News Company has the rights to sell and deliver the city newspaper in a designated area in the country. A monthly subscription sells for $30.00 and Nottingham News pays $10.00 per month for each newspaper subscription. In addition to this variable cost, Nottingham News has fixed costs of $3,000 per month. Nottingham News currently activity level is 700 subscriptions.

Required:
a. Calculate the contribution margin ratio and explain the ratio as it pertains to Nottingham News Company.
b. Use the mathematical formula to calculate Nottingham Newsâ€™ monthly breakeven point in units (number of subscriptions).
c. Use the shortcut contribution margin approach to calculate Nottingham Newsâ€™ monthly breakeven in units (number of subscriptions).
d. Prove the breakeven point by preparing a contribution margin income statement.
e. Use the contribution margin ratio, which you calculated in number one to compute Nottingham Newsâ€™ breakeven point in sales dollars.
f. Calculate the margin of safety ratio and explain the ratio as it pertains to Nottingham News Company.
g. The owner of Nottingham Newsâ€™ wants to earn a $10,000 profit per month. Calculate the sales volume in units (number of subscriptions) and sales dollars required to achieve this level of profit.

a. The Contribution Margin is the Selling Price less the Variable Cost therefore the Contribution Margin Ratio is the Selling Price less the Variable Cost with the result divided by the Selling Price.

Contribution Margin Ratio = (30 - 10) / 30

= 20/30

= 66.7%

This means that for every Monthly subscription that Nottingham News sells, they have 66.7% of the income left to.cover Fixed Costs.

b. The Break-Even Point is the point at which the company is making no losses and no profit. To calculate this, you can use a little algebra.

Px = Vx + F

P is the Price of subscription

x is the units

V is the Variable cost

F is fixed cost

30x = 10x + 3,000

20x = 3,000

x = 3,000/20

x = 150 units.

Break-Even Point is 150 subscriptions.

c. An easy formula to calculate the Break-Even Point is to divide the fixed costs by the Contribution Margin.

Fixed Costs are $3,000.

Contribution Margin = 30 - 10 = $20

Break-Even = 3,000 / 20

= 150 subscriptions

d. Contribution Margin Income Statement.

Sales (150 units * $30) $4,500

Variable Costs ( 150 * 10) ($1,500)

Contribution Margin $3,000

Fixed Costs ($3,000)

Net Income $0

e. The Break-Even Point is 150 units.

Break-Even Point in dollars will be,

= 150 units * $30 ( sales price)

= $4,500

$4,500 is Break-Even Point in dollars.

f. The Margin of safety ratio is the Percentage by which a company can reduce in sales and still be able to cover all costs.

Nottingham news usually sells 700 units.

Their Margin of safety ratio is

=( Actual Sales - Break-Even Sales) / Actual Sales

= (700 - 150 ) / 700

= 0.79

= 79%

Nottingham News can lose sales of 79% and still be able to pay off their costs.

g. Treat the $10,000 as a fixed income and use it to calculate a new Break-Even Point.

= (Fixed Costs + $10,000 income) / Contribution Margin

= (3,000 + 10,000)/20

= 13,000/20

= 650 units.

650 subscriptions are needed for that income which translates to $19,500 in sales dollars.

= 650 * 30

= $19,500