Question

PROBLEM 4-18 Basic Cost-Volume-Profit Analysis (L01, LO3, L04, LO5, LO8] Klein Company distributes a high-quality bird feeder that sells for $30 per unit. Variable costs are $12 per unit, and fixed costs total $270,000 annually. Required: Answer the following independent questions: 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. The company estimates that sales will increase by $60,000 during the coming year due to increased demand. By how much should operating income increase?

Answer 1

Answer 1.

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $360,000 / $600,000
Contribution Margin Ratio = 60%

Answer 2.

Breakeven in dollar sales = Fixed Expenses / Contribution Margin Ratio
Breakeven in dollar sales = $270,000 / 0.60
Breakeven in dollar sales = $450,000

Answer 3.

Increase in Sales = $60,000

Increase in Net Operating Income = Increase in Sales * Contribution Margin Ratio
Increase in Net Operating Income = $60,000 * 60%
Increase in Net Operating Income = $36,000

Answer 4-a.

Degree of Operating Leverage = Contribution Margin / Net Operating Income
Degree of Operating Leverage = $360,000 / $90,000
Degree of Operating Leverage = 4.00

Answer 4-b.

% Increase in Sales = 16%

Degree of Operating Leverage = % Increase in Net Operating Income / % Increase in Sales
4.00 = % Increase in Net Operating Income / 16%
% Increase in Net Operating Income = 64.00%

Answer 5.

Selling Price per unit = $30.00 - 12% * $30.00
Selling Price per unit = $26.40

Variable Expense per unit = $12.00

Fixed Expenses = $270,000 + $40,000
Fixed Expenses = $310,000

Number of units sold = 23,000 + 30% * 23,000
Number of units sold = 29,900

Income Statement Sales (29,900 * $26.40) Variable expenses (29,900 * $12.00) Contribution margin Fixed expenses Operating income $ $ $ 789,360 358,800 430,560 310,000 120,560

Yes, the manager should implement these changes as net operating income will increase by $30,560 ($120,560 - $90,000).

Answer 6.

Selling Price per unit = $30.00

Variable Expense per unit = $12.00 + $4.00
Variable Expense per unit = $16.00

Let increase in advertising be $x

Fixed Expenses = $270,000 + $x

Number of units sold = 23,000 + 50% * 23,000
Number of units sold = 34,500

Net Operating Income = Sales - Variable Expenses - Fixed Expenses
Net Operating Income = Selling Price per unit * Number of units sold - Variable Expense per unit * Number of units sold - Fixed Expenses
$90,000 = $30.00 * 34,500 - $16.00 * 34,500 - ($270,000 + $x)
$90,000 = $1,035,000 - $552,000 - $270,000 - $x
$x = $123,000

Increase in advertising expense is $123,000.