Question

Dana's Ribbon World makes award rosettes. Following is information about the company: Variable cost per rosette Sales price per rosette Total fixed costs per month $ 2.80 6.00 3200.00 Required: 1. Suppose Dana's would like to generate a profit of $1,100. Determine how many rosettes it must sell to achieve this target profit. 2. If Dana's sells 2,120 rosettes, compute its margin of safety in units, in sales dollars, and as a percentage of sales. 3. Calculate Dana's degree of operating leverage if it sells 2,120 rosettes. 4a. Using the degree of operating leverage, calculate the change in Dana's profit if unit sales drop to 1,802 units. 4b. Prepare a new contribution margin income statement to verify change in dana's profit. Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Req3 Req 4A Req 4B Suppose Dana's would like to generate a profit of $1,100. Determine how many rosettes it must sell to achieve this target profit. (Round your intermediate calculations to 2 decimal places and round your final answer up to nearest whole number.) Target Units

Answer 1

1. Contribution margin per unit = Sales price per unit - Variable costs per unit

= $6 - $2.8

= $3.2

Units to be sold = (Fixed costs + Desired profit) / Contribution margin per unit

= ($3,200 + $1,100) / $3.2

= 1,344

2. Break-even sales = Fixed costs / Contribution margin per unit

= $3,200 / $3.2

= 1,000

Margin of safety in units = Sales - Break-even sales

= 2,120 - 1,000

= 1,120

Margin of safety in sales dollars = 1,120 units * $6 = $6,720

Margin of safety as a percentage of sales = Margin of safety / Sales * 100

= 1,120 / 2,120

= 52.83%

3.

Sales	$12,720 (2,120*$6)
Variable costs	$5,936 (2,120*$2.8)
Contribution margin	$6,784
Fixed costs	$3,200
Net income	$3,584

Degree of operating leverage = Contribution margin / Net income

= $6,784 / $3,584

= 1.89

4a. Percentage change in units = (2,120 - 1,802) / 2,120

= 15%

Decrease in profit = 0.15 * 1.89

= 28.35%

Change in profit = $3,584 * 28.35% = $1,016

4b.

Sales	$10,812 (1,802*$6)
Variable costs	$5,045.6 (1,802*$2.8)
Contribution margin	$5,766.4
Fixed costs	$3,200
Net income	$2,566

* Percentages are rounded to 2 decimal places.

* Amounts are rounded to 0 decimal places.