Question

3. A company that makes organic fertilizer has supplied the following data: Bags produced and sold Sales revenue Variable manufacturing expense Fixed manufacturing expense Variable selling and administrative expense Fixed selling and administrative expense Net operating income 240,000 $1,896,000 $804,000 $520,000 $180,000 $270,000 $122,000 The company's degree of operating leverage is closest to: A. 1.97 B. 15.54 C. 1.25 D. 7.48 4. The Catherine Corporation manufactures and sells two types of bookcases, standard and deluxe. Catherine expects the following operating results next year for each type of bookcase: Sales Variable expenses (total) Standard $450,000 $180,000 Deluxe $50,000 $20,000 Catherine expects to have a total of $57,600 in fixed expenses next year. What is Catherine's break-even point next year in sales dollars? A. $72,000 B. $144,000 C. $96,000 D. $240,000

Answer 1

Answer D. 7.48 Working Notes: Degree of operating Leverage = Contribution Margin/Net opearing Income Contribution margin = Sales Revenue - Variable Cost Variable Cost = Variable Manufacturing expense + Variable selling and administrative expense = $804,000+$180,000 = $984,000 Contribution margin = $1,896,000-$984,000 = $912,000 Degree of operating Leverage = $912,000/$122,000 = 7.48 Answer C. $96,000 Working Notes: Contribution margin statement Particulars Stanadrd sales $450,000 Less: Variable expense $180,000 Contribution margin $270,000 Deluxe Total Company $50,000 $ 500,000 $20,000 $ 200.000 $30,000 $ 300,000 Overall Contribution margin ratio = Contribution margin / Sales = $300,000/$500,000 = 60% Break even point in sales = Fixed Cost / Contribution margin ratio = $57,600/60% = $96,000