Question

SunlandTot sells a learning system that helps preschool and elementary students learn basic math facts and concepts. The company’s income statement from last month is as follows:

		Total		Per Unit
Sales revenue		$745,200		$54
Variable expenses		335,340		24.30
Contribution margin		409,860		$29.70
Fixed expenses		247,500
Operating income		$ 162,360

(a)

Correct answer iconYour answer is correct.

What is SunlandTot’s contribution margin ratio? Its variable cost ratio? (Round ratios to 2 percentage places, e.g. 0.38 = 38%.)

Contribution margin ratio		Enter percentages rounded to 2 decimal placesEnter percentages rounded to 2 decimal placesEnter percentages rounded to 2 decimal places	%
Variable cost ratio		Enter percentages rounded to 2 decimal placesEnter percentages rounded to 2 decimal placesEnter percentages rounded to 2 decimal places	%

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Attempts: 1 of 3 used

(b1)

Compute breakeven sales. (Use the rounded contribution margin ratio calculated in the previous part to compute breakeven sales.)

Breakeven sales

$Enter breakeven sales in dollars Enter breakeven sales in dollarsEnter breakeven sales in dollars

  (b2)

What is SunlandTot’s margin of safety?

Margin of safety

$Enter margin of safety in dollars Enter margin of safety in dollarsEnter margin of safety in dollars

(c)

If SunlandTot’s sales were to increase by $100,000 with no change in fixed expenses, by how much would operating income increase? (Use the rounded contribution margin ratio calculated in the previous part to compute breakeven sales.) Please show work

Net Operating income will increase by

$Enter the operating income increase in dollars Enter the operating income increase in dollarsEnter the operating income increase in dollar

(d)

SunlandTot’s managers have determined that variable costs per unit will increase by 19% beginning next month. To offset this increase in costs, they are considering a 12% increase in the sales price. Market research indicates that the price increase will result in a 3% decrease in the number of learning systems SunlandTot sells. What will be SunlandTot’s expected operating income if the price increase is implemented? (Round per unit calculations to 2 decimal places e.g. 52.75 and final answer to 0 decimal places, e.g. 5,275.)

Operating income

$Enter operating income in dollars rounded to 0 decimal places Enter operating income in dollars rounded to 0 decimal placesEnter operating income in dollars rounded to 0 decimal places

Answer 1

E Solution : a.) Calculation of Contribution Margin Ratio & Variable Cost Ratio:- Sales Revenue Contribution Margin $745,200 $409,860 Contribution Margin Ratio = (Contribution Margin / Sales) *100 = ($ 409860 / $ 745200 ) *100 = 55% OH Variable Cost Ratio - 1 - Contribution Margin Ratio = 1 -0.55 = 45% 3 b1.) Calculation of Break Even Sales :- Total Fixed Expenses = $ 247500 st Break Even ( in sales Dollars ) = Total Fixed Costs / Contribution Margin Ratio Nimmo = $ 247500 / 55% = $ 450000 1 b2.) Calculation of Margin of Safety :- 3 Margin of Safety = (Current Sales Level - Break Even Sales) 5 Current Sales Level 5 Break Even Sales $745,200 $450,000 B Margin of Safety = $ 745200 - $ 450000 = $ 295200

30 c. Calculation of Increase in operating Income if sales were increase by $ 100000:- 32 New Sales Revenue = $ 745200 + $ 100000 = $ 845200 33 Contribution Margin Ratio = 55% 34 Therefore, New Contribution Margin = $ 845200 * 55% = $ 464860 35 Total Fixed Expenses = $ 247500 36 Therefore, New Operating Income = $ 464860 - $ 247500 = $ 217360 37 Net Increase in Operating Income = $ 217360 - $ 162360 = $ 55000 39 d. Calculation of Expected Operating Income if the price increase is implemented 91 New Selling Price per unit = $ 54 * 112% = $ 60.48 12 New Variable cost per unit = $ 24.30 * 119% = $ 28.92 13 Therefore New contribution Margin per unit = $ 60.48 - $ 28.92 = $ 31.56 15 Existing No. of Units = $ 745200 / $ 54 = 13800 Units 16 Expected No. of Units = 13800 * 97% = 13386 Units 18 Total Contribution Margin = 13386 Units * $ 31.56 per Unit = $ 422462 19 Total Fixed Expenses = $ 247500 50 Therefore, Expected Operating Income = $ 422462 - $ 247500 = $ 174962