Question

Klein Company distributes a high-quality bird feeder that sells for $30 per unit. Variable costs are $12 per unit, and fixed costs total $270,000 annually. Required: Answer the following independent questions: 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. The company estimates that sales will increase by $60,000 during the coming year due to increased demand. By how much should operating income increase? 4. Assume that the operating results for last year were as follows: Page 125 Sales $ 600,000 Variable expenses 240,000 Contribution margin 360,000 Fixed expenses 270,000 Operating income $ 90,000 a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 16% next year. By how much should operating income increase?

Answer 1

1) CM ratio = (30-12)/30 = 60%

2) Break even sales = Fixed cost/Contribution margin ratio = 270000/.60 = $450000

3) Net income increase by 60000*60% = $36000

4a) Degree of operating leverage = 360000/90000 = 4 Times

4b) Net income increase by 16*4 = 64%

Operating income increase = 90000*1.64 = $147600