Question

7.If the variable cost per unit increases by $1, spending on advertising increases by $1,250, and unit sales increase by 150 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 $8,400?

11.What is the margin of safety in dollars?

12.What is the margin of safety percentage?

13.What is the degree of operating leverage?

14.Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

15.Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $8,400 and the total fixed expenses are $21,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

16. Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $8,400 and the total fixed expenses are $21,000. Given this scenario, and assuming that total sales remain the same, calculate the degree of operating leverage. Using the calculated degree of operating leverage, what is the estimated percent increase in net operating income of 5% increase in sales?

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 to 1,500 units): Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 35,000 21,000 14,000 8,400 $ 5,600

Answer 1

Current selling price per unit ($35,000/1,000 units)	$35
Less: Current variable cost per unit ($21,000/1,000 units)	($21)
Current contribution margin per unit	$14
Current fixed costs	$8,400
7)
Revised Sales revenue (1,000 + 150 units = 1,150 * $35)	$40,250
Less: Reised Variable costs ($21 + $1 = $22 * 1,150)	($25,300)
Revised Contribution Margin	$14,950
Less: Revised Fixed costs ($8,400 + $1,250)	($9,650)
Net operating income	$5,300
8)
Total revised fixed costs (a)	$9,650
Revised contribution margin per unit ($35 - $22) (b)	$13
Break-even point in units (a/b)	742
9)
Total revised fixed costs (a)	$9,650
Revised contribution margin ratio ($35 - $22 = $13/$35*100)(b)	0.3414
Break-even point in dollars (a/b)	$28,266
10)
Total revised fixed costs (a)	$9,650
Target profit (b)	$8,400
Revised contribution margin per unit ($35 - $22) (c )	$13
Units must be sold to achieve a target profit of $8,400 [(a + b)/c]	1,388
11)
Total Revised sales revenue	$40,250
Less: Break-even point in dollars	($28,266)
Margin of safety in dollars	$11,984
12)
Margin of safety in dollars (a)	$11,984
Total Revised sales revenue (b)	$40,250
Margin of safety percentage (a/b)	30%

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