Question

1. Determine the break even point 2 Compute the margin of safety and explain its significance. 3. Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income EERS. CVP Analysis - Excel 7 - X HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW Sign in A Alignment Number Conditional Formatas Cell Formatting Table - Soyles Cells Editing Given the following information complete a CVP analysis CD 1 Given the following information complete a Cve analysis lor IPL, Inc.: Unit sales Selling price per unit Variable expenses per unit 7 Fixed expenses 11,200 units $75 per unit $45 per unit $210,000 9 Use the data to answer the following. 11 1. Compute the CM ratio and variable expense ratio 12Selline nie nerunt < Prev 2 of 2 Next search 4 CM

Answer 1

1. Selling price per unit $75

Variable expenses per unit $45

Contribution margin per unit = $ 30

Contribution margin ratio = 30/ 75 * 100 = 40%

Variable Expense ratio = 100% - 40% = 60%

2. Break even point (units) = Total Fixed cost/ Contribution per unit

= $210,000 / $ 30

= 7,000 units

Break even point (in dollars) = 7000 units * $75 per unit = $525,000

3. Margin of safety (in dollars) = Current sales - Break even sales

= (11200 units * $75) - (7000 units * $75) = $ 315,000

Margin of safety percentage = (Current sales - Break even sales) / Current sales

= (11200 units * $75) - (7000 units * $75) / (11200 units * $75) * 100 = 37.50%

Significance of margin of safety: It is an important figure for any business because it tells the management how much reduction in revenue will result in break even. A higher Margin of safety reduces the risk of business losses.

4. Sales 840,000

Variable expense 504,000

Contribution 336,000

Fixed expenses 210,000

Net Income 126,000

Degree of operating leverage = [Quantity * (price - variable cost per unit)] / [Quantity * (price - variable cost per unit)] - Fixed operating cost

= 11200 * (75-45) / 11200 * (75-45) - 210,000

= 336000 / (336000-210000)

= 2.67

It measures the degree to which a firm or project can increase operating income by increasing revenue. A business that generate sales with a high gross margin and low variable costs has a high operating leverage. Degree of operating leverage increases with an increase in the total fixed costs.