Question

ABC Company projected the following operating income for the coming year: Units sold 385,000 $ Sales revenue Variable expenses Contribution margin Fixed expenses Operating income 9,240,000 7,392,000 1,848,000 1,663,200 184,800 a) b) Como $ 330,000 Compute break-even points in sales dollars. Compute the number of units to be sold to earn operating income of: Compute the additional income the company would earn if sales were to increase by $ 55,000 more than expected. Ignore g) above, based on the sales revenue in the question, compute the margin of safety in sales dollars. Compute the degree of operating leverage. e)

Answer 1

Answer to Part a.
Contribution Margin Ratio = Contribution Margin / Sales Revenue * 100
Contribution Margin Ratio = $1,848,000 / $9,240,000 * 100
Contribution Margin Ratio = 20%

Break Even Sales (in Dollars) = Fixed Cost / Contribution Margin Ratio
Break Even Sales (in Dollars) = $1,663,200 / 0.20
Break Even Sales (in Dollars) = $8,316,000

Answer to Part b.

Desired Dollar Sales = (Fixed Cost + Desired Profit) / Contribution Margin Ratio
Desired Dollar Sales = ($1,663,200 + $330,000) / 0.20
Desired Dollar Sales = $9,966,000

Selling price per Unit = $9,240,000 / 385,000
Selling price per Unit = $24

No. of Units to be sold to earn desired income = Desired Dollar Sales / Selling price per Unit
No. of Units to be sold to earn desired income = $9,966,000 / $24
No. of Units to be sold to earn desired income = 415,250 Units

Answer to Part c.

Additional Income = Increase in Contribution Margin on Increased Sales
Additional Income = $55,000 * 20%
Additional Income = $11,000

Answer to Part d.

Margin of Safety (in Dollar Sales) = Current Dollar Sales – Break Even Dollar Sales
Margin of Safety (in Dollar Sales) = $9,240,000 - $8,316,000
Margin of Safety (in Dollar Sales) = $924,000

Answer to Part e.

Degree of Operating Leverage = Contribution Margin / Operating Income
Degree of Operating Leverage = $1,848,000 / $184,800
Degree of Operating Leverage = 10 times