Question

Stratford Company distributes a lightweight lawn chair that sells for $40 per unit. Variable expenses are $18 per unit, and fixed expenses total $220,000 annually. Results for last year are as follows: Sales (20,000 units) Variable expenses $ 800,000 360,000 Contribution margin Fixed expenses 440,000 220,000 Operating income $ 220,000 Required: 1. Calculate the company's CM ratio and its break-even point in sales dollars and in units. CM ratio Break-even point in sales dollars Break-even point in units 2. If sales increase by $56,000 during the coming year due to increased demand, by how much should operating income increase? Use the incremental approach in preparing your answer. Operating income increases by

Answer 1

1	Unit Sales	20,000 units
	Sales	$40	$8,00,000
	Variable expenses	$18	$3,60,000
	Contribution margin	$22	$4,40,000
	Fixed expenses		$2,20,000
	Net operating income		$2,20,000
	CM Ratio(Contribution margin/Sales)	55%
	Breakeven point in sales(Fixed expenses/CM ratio)	$4,00,000
	Breakeven point in unit(Fixed expenses/CM per unit)	10000	units
2	Incremental no. of units sold($56,000/$40)	1,400	units
	Incremental sales	$56,000
	Incremental variable costs(1400*$18)	$25,200
	Contribution margin	$30,800
	So the Net operating income should increase by $30,800
3.a	Stratford company
	Contribution margin Income statement
		Propsed
		32000	units
		Total	Per unit
	Sales	$10,88,000	$34.00
	Variable expenses	$3,60,000	$11.25
	Contribution margin	$7,28,000	$22.75
	Fixed expenses($220,000+$210,000)	$4,30,000
	Net operating income	$2,98,000
3.b	Yes the company should proceed with the change