Question

Group Work Question 1) Alhekma Company manufactures and sells a specialized cordless telephone for high electromagnetic radiation environments. The company's contribution format income statement for the most recent year is given below: Total $1,500,000 1200,000 300,000 200,000 100,000 Sales (30,000 units) Variable expenses Contribution margin Fixed expenses Net operating income Per unit 550 40 $10 Percent of sales 100% 7 % 7% Management is anxious to increase the company's profit and has asked for an analysis of a number of items. Required: 1. Compute the company's CM ratio. (1 mark) 2. Compute the company's break-even point in both unit sales and dollar sales. (0.5+0.5 = 1 mark) 3. Assume that sales increase by $400,000 next year. If cost behaviour patterns remain unchanged, by how much will the company's net operating income increase? (1 mark) 4. Refer to the original data. Assume that next year management wants the company to earn a profit of at least $90,000. How many units will have to be sold to meet this target profit? (1 mark) 5. Refer to the original data. Compute the company's margin of safety in both dollar and percentage form. (0.5+0.5 = 1 mark) 6. Compute the company's degree of operating leverage at the present level of sales. (1 mark) 7. Assume that through a more intense effort by the sales staff, the company's sales increase by 8% next year. By what percentage would you expect net operating income to increase. (1 mark) 8. Refer to the original data. In an effort to increase sales and profits, management is considering the use of a higher quality speaker. The higher-quality speaker would increase variable costs by $3 per unit, but management could eliminate one quality inspector who is paid a salary of $30,000 per year. The sales manager estimates that the higher-quality speaker would increase annual sales by at least 20%. Would you recommend that the changes be made? Show your work (1 mark)

Answer 1

19,00,950 XQ01. - 200,000 t profit 380.000 -- 200,000 profit >1,80,000 Nel operating income will increase by $20,000 ($120,000-$100,006) Derived propt => 490,000 Desired şales (units) - Fixed cost + desired profit contribution for units. => 200,000 +90,000 10 290,000 - Perised şalesunits)> 27,000 units - 6 Margin of safety = Totals ales - Break even sales. >$1,500,000 - $1000000 Margin of safety (doblary) >> $ 199000 Margin of Safety (porcentage farm) = MOS +100 >500,000_X100 1800000 $33,337.9 Sales. Morgin of safety Garcentage fent per conto 16 Degree of operating leverage = contribution - Earnings before income & Taxes. >>$300000 $109000 Degree of operating lowerage = 3.

LLLLLLA. LE199 999 Gimeno Sales = $1,500,000 Variablexpenses $1,200,000 contribution margin= $300,000 Fixed esperies - $ 200.000 Net operating income =$100,000 · 0 Contribution Margin Ratio - Sales - Variable expenses - sales => $1,500,000 - $1,200,000 $1,500,000 =>_$300,000 900.000 > 0 1 Breakeven point (sales) - Fixed cost contribution margin ratio => $200,000 Break even point (dollar Sales =>$1,000,000 Break even point (unet sales) => Fixed cost * contribution pole. * Contributionale = Contribution No funits sold -> $200,000 $10 -) 300,000 30,000 Break even point => 20,000 units contribution pu.-10 Canet sales) 3 Derived Sales = fixed cost + derived profit contribution margin ratis 1,500,000+ 400,000 - 200,000+ profit 20% 19000000 - 200000 + profit doy