Review: Variable Costing Break-Even Margin of Safety

1. Review: Variable Costing Break-Even Margin of Safety

2. Facts The following income statement data were taken from the financial statements of Pillsbury Company:

3. Facts (cont’d) Assume that the costs have been classified into the following fixed and variable components:

4. Now THAT’s a lot of dough! 1) Prepare a variable costing income statement. (in millions) Sales $6,190.6 Variable Cost of Goods Sold 3,457.8 Mfg Margin $2,732.8 Var S, G, and Admn Exp 968.7 Contribution Margin $1,764.1 Fixed Costs and Exp: Manufacturing $864.5 S, G, and Admn 645.8 Interest Expense 97.8 1,608.1 Income from Operations $156.0

5. 2) Determine the contribution margin ratio. CM S $1,764.1 $6,190.6 = 28.5% 3) What is the percent of variable costs and expenses? 1 - 28.5% = 71.5%

6. 4) Determine the break-even point. S = FC + VC S = ???

7. 1) Prepare a variable costing income statement. (in millions) Sales $6,190.6 Variable Cost of Goods Sold 3,457.8 Mfg Margin $2,732.8 Var S, G, and Admn Exp 968.7 Contribution Margin $1,764.1 Fixed Costs and Exp: FC Manufacturing $864.5 S, G, and Admn 645.8 Interest Expense 97.8 1,608.1 Income from Operations $156.0

8. 4) Determine the break-even point. S = FC + VC S = $1,608.1 + .715 S .285S = $1,608.1 S = $5,642.5

9. Determine the margin of safety (1) in dollars and (2) as a percent. MS$ =Sa -Sbe MS$ = $6,190.6 - $5,642.5 MS$ = $548.1 million MS% = MS$ SA MS% ≈ 9%