Question

 Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to1,500 units):

 Sales..  $20,000

 Variable expenses..  12,000

 Contribution margin..  $8,000

 Fixed expenses..  6,000

 Net operating income..  $2,000

 Required:

 (Answer each question independently and always refer to the original data unless instructed otherwise.)

 1. What is the contribution margin per unit?

 2. What Is the contribution margin ratio?

 3. What is the variable expense ratio?

 4. If sales increase to 1,001 units, what would be the increase in net operating income?

 5. If sales decline to 900 units, what would be the net operating income?

 6. If the selling price increases by 2per unit and the sales volume decreases by 100 units, what would be the net operating income?

 7. If the variable cost per unit increases by $l, spending on advertising increases by $1,500, and unit sales increase by 250 units, what would be the net operating income?

 8. What is the break even point in unit sales?

 9. What is the break even point in dollar sales?

 10. How many units must be sold to achieve a target profit of $5,000?

 11. What is the degree of operating leverage?

 12. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a5% increase in sales?

 13. Assume that the amount of the company's total variable expenses and total fixed expenses were reversed In other words, assume that the total variable expenses are $6,000 and the total fixed expenses are$12,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

 14. Using the degree of operating leverage that you computed in the previous question, what is the estimated percent increase in net operating income of a5% increase in sales?

Answer 1

1: Contribution margin per unit = $8,000/1,000 units = $8 per unit

2: Contribution margin ratio = (sales – variable expenses)/sales = (20000-12000)/20000 = 40%

3: Variable expense ratio = variable expenses/sales = 12000/20000 = 60%

4: Sales increased to 1,001 units then sales and variable expenses will change. New sales = 20,000/1000*1001 = 20020 and variable expenses = 12,000/1000*1001 = 12012. New net operating income = 20020-12012-6000 = 2,008. Thus increase in net income = 2008-2000 = $8

5: New sales = 20,000/1000*900 = 18000. New variable expenses = 12000/1000*900 = 10800. Thus new net operating income = 18000-10800-6000 = $1,200.

6: Here selling price will be (20000/1000)+2 = 22 and sales volume = 1000-100 = 900. Thus net operating income = (22*900) - (12*900) – 6000 = $3,000

7: Here new variable cost per unit = 12+1 = $13, new fixed cost = 6000+1500 = 7500 and new sales volume = 1000+250 = 1250 units. Net operating income = (1250*20) – (1250*13) – 7500 = $1,250

8: Break even point in unit sales = fixed costs/contribution margin per unit = 6000/(8000/1000) = 750 units

9: Break even point in dollar sales = 750 units*$20 per unit = $15,000

10: To achieve a profit of $5,000 the no. of units = (fixed costs+profit)/contribution margin per unit = (6000+5000)/8 = 1,375 units

11: Degree of operating leverage = [Quantity x (Price – Variable Cost per Unit)] / Quantity x (Price – Variable Cost per Unit) – Fixed Operating Costs

= (sales – variable costs)/profit

= (20000-12000)/2000

= 400% or 4

12: A 5% increase in sales will yield 20% increase in profit (400/100*5)

13: Here degree of operating leverage = (20000-6000)/2000

= 700% or 7

14: A 5% increase in sales will yield a 35% increase in profit (700/100*5)