Question

Problem 4-18 Basic Cost-Volume-Profit Analysis (L01, LO3, LO4, LOS, LOS] Klein Company distributes a high-quality bird feeder that sells for $20 per unit. Variable costs are $5 per unit, and fixed costs total $81,000 annually. Required: Answer the following independent questions: 1. What is the product's CM ratio? CM ratio % 2. Use the CM ratio to determine the break-even point in sales dollars. Break-even point in sales dollars canned with CamScanner 3. The company estimates that sales will increase by $50,000 during the coming year due to increased demand. By how much should operating income increase? S

Answer 1

1)	CM ratio	=	(Sales - Variable Cost) / Sales
		=	($ 20 - $ 5) / $ 20
		=	75%

2)	BEP in sales	=	Fixed Cost / CM ratio
		=	$ 81000 / 75%
		=	$ 108,000.00

3)	$ 50000 increased sales x 75% CM ratio =				$ 37,500.00
	Since the fixed cost will not change, Operating income shall
	also increase by $ 37500

4)
a)	Degree of Operating Leverage =			Cont. Margin / Operating Income
			=	$ 162000 / $ 81000
			=	2
b)	Since DOL is 2, therefore increase in sales by 10% will result in
	a 20% (2 x 10%) increase in operating income
	Which would be $ 81000 x 120% = $ 97200
	Operating Income increased by $ 16200

As HOMEWORKLIB RULES's policy, I've completed first 4 parts of the question