Question

CVP analysis—what-if questions; sales mix issue Ozark Metal Co. makes a single product that sells for $42 per unit. Variable costs are $27.30 per unit, and fixed costs total $65,415 per month. Required: a. Calculate the number of units that must be sold each month for the firm to break even. b. Assume current sales are $220,000. Calculate the margin of safety and the margin of safety ratio. c. Calculate operating income if 5,000 units are sold in a month. d. Calculate operating income if the selling price is raised to $45 per unit, advertising expenditures are increased by $8,000 per month, and monthly unit sales volume becomes 5,400 units. adds another product to its product line and that the new product sells for $20 per unit, has variable costs of $14 per unit, and causes fixed expenses in total to increase to $83,000 per month. Calculate the firm's operating income if 5,000 units of the original product and 4,000 units of the new product are sold each month. For the original product, use the selling price and variable cost data given in the problem statement. f. Calculate the firm's operating income if 4,000 units of the original product and 5,000 units of the new product are sold each month. g. Explain why operating income is different in parts e and f, even though sales totaled 9,000 units in each case.

Answer 1

a Number of units must be sold each month for Breaker Sale Price = Novable cost = contribution Margin= $42 per unit 27.36 14.70 peronit Breakeven (lua its)= fixed cost contribution maogin $ 65,415 14.70 - 4450 units 6. Breakeren in (7)= current sales - safety = 44,50 X 42 $184,900 $22000 current sales - Break ellensoles 9220,00 - 9186,90 Margin of ' $33,100 Margin at safety Ratios Margin of safety ceprent sales u xico $33,10 $220000 157

sold ) c. oprating profit it (5,000 units Perunit 42 sales Revenue (1500x42) variable cost (1500X 27.30) I Totol & 63,00 $40950 27.30 14.70 contribution margin fixed cost operating Pootit 19139500 65415 $74085 operating Income .... Perunit Total $24300 45 sale Revence (540x 45) Variable cost (54000 27.30) $147420 27.30 95580 17.70 Carribution margin Fixed cost C65,415+ $8000) 73,415 22,165 o parating foofit 42 agrow New product oed Produet | Total Torala plerunit. Total I Perunit sales Revenue 800wo 20 Alqouo variable cost 5600 14 113 6.500 (27:30 19250 Coubibution margin grow 6 73,500 14.70 97,50 Fixed cost 8306 operature poufit 1814, 50

(f) New Product Total | Prounit 100,ow | 20 79 0 14 Sales Revencee less'a vaurable cost I old looduct I Torol Toral I Perunit 16800 42 269 ow 109200 27.30 179200 5880 14.70 & & &o 83000 7.30 lessa hired cost opeating Income 580 operating Income of fart (es is higher than operating Income of part (f, because no of unit sold of original product was more that New Product The contribution margin of Orginal Soft product is higher than the New product These fore operating profit is high in the case where ogginal units are more sold. -