Homework Answers
Contribution margin ratio= Contribution margin*100/Sales
= $15*100/60= 25%
Variable expenses ratio= Variable expenses*100/Sales
= $45*100/60= 75%
1) Degree of operating leverage= Contribution margin/Net operating income
= $300000/60000= 5
2) Operating leverage= Percentage change in net operating income/Percentage change in sales
5= Percentage change in net operating income/8%
Percentage change in net operating income= 5*8%= 40%
New net operating income= $60000*1.40= $84000
3)
| Total | |
| Sales ($1200000*1.08) | $1296000 |
| Variable expenses (1296000*75%) | 972000 |
| Contribution margin | 324000 |
| Fixed expenses | 240000 |
| Net operating income | $84000 |
4) 1) New variable expenses= $45+3= $48 per unit
New fixed expenses= $240000-30000= $210000
New sales units= 20000*1.20= 24000 units
| Total | |
| Sales (24000*$60) | $1440000 |
| Variable expenses (24000*$48) | 1152000 |
| Contribution margin | 288000 |
| Fixed expenses | 210000 |
| Net operating income | $78000 |
2) Contribution margin per unit= $60-48= $12
Contribution margin ratio= $12*100/60= 20%
Break even point in units= Fixed expense/Contribution margin per unit
= $210000/12= 17500 units
Break even point in dollar sales= Fixed expense/Contribution margin ratio
= $210000/20%= $1050000
3) Yes, the changes should be made as when these changes are made the net operating income of the company will increases from $60000 to $78000.
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