Question

OSLO COMPANY PREPARED THE FOLLOWING CONTRIBUTION FORMAT INCOME STATEMENT BASED ON SALES VOLUME OF $1,000 UNITS ( THE RELEVANT RANGE OF PRODUCTION IS 500 UNITES TO 1500 UNITS.  

SALES $20,000

VARIABLE EXPENSES $12,000

CONTRIBUTION MARGIN $8,000

FIXED EXPNSES $6,000

NET OPERATING INCOME $2,000

1. WHAT IS THE CONTRIBUTION MARGIN PER UNIT?

2. WHAT IS THE CONTRIBUTION MARGIN RATIO?

3. WHAT IS THE VARIABLE EXPENSE RATIO?

4. IF SALES INCREASE TO 1,001 UNITS, WHAT WOULD BE THE INCREASE IN NET OPERATING INCOME?

5. IF SALES DECLINE TO 900 UNITS, WHAT WOULD BE THE NET OPERATING INCOME?

6. IF SELLING PRICE INCREASES BY $2 PER UNIT AND THE SALES VOLUME DECREASES BY 100 UNITS, WHAT WOULD BE THE NET OPERATING INCOME.

7. IF THE VARIABLE COST PER UNIT INCREASES BY $1, SPENDING ON ADVERTISING INCREASES BY $1.500 AND UNIT SALES INCREASE BY 250 UNITS, WHAT WOULD BE THE NET OPERATING INCOME.

8. WHAT IS THE BREAK -EVEN POINT IN UNIT SALES?

9; WHAT IS THE BREAK -EVEN POINT IN DOLAR SALES?

10. HOW MANY UNITS MUST BE SOLD TO ACHIEVE A TARGET PROFIT OF $5,000?

11. WHAT IS THE DEGREE OF OPERATING LEVERAGE?

12 USING THE DEGREE OF OPERATING LEVERAGE, WHAT IS THE ESTIMATED PERCENT INCREASE IN NET OPERATING INCOME OF 5% INCREASE IN SALES?

13 ASSUME THAT THE AMOUNT OF COMPANY'S TOTAL VARIABLE EXPENSES AND TOTAL FIXED EXPENSES WERE REVERSED, IN OTHER WORD, ASSUME THAT THE TOTAL FIXED EXPENSES ARE $12,000. UNDER THIS SCENARIO AND ASSUMING THAT TOTAL SALES REMAIN THE SAME, WHAT IS THE DEGREE OF OPERATING LEVERAGE?

14. USING THE DEGREE OF OPERATING LEVERAGE THAT YOU COMPUTED IN THE PREVIOUS QUESTION, WHAT IS THE ESTIMATED PERCENT INCREASE IN NET OPERATING INCOME OF A 5% INC5RASE IN SALES?

Answer 1

This question has many sub questions. As per the company policy, I am answering only for the first 4 sub questions.

1) Contribution per unit is equal to :( Sales - Variable cost )/ Number of Units

2) Contribution Margin is equal to Contribution / Sales

3) Variable Expense ratio is equal to 1- Contribution Margin ratio

4) As number of units increase will not increase the fixed cost , the increase in net operating income will be equal to increase in Contribution because of increase in units.

contribution o Margin Pee Unit Sales - Variable Nuntur of cost unite 8.000 1,000 $B Per unit. I contribution Margin Ratio Contribution Sales 8.000 20.000 Ratio 1- expense : Contribution margin ③ Variable

ME 4 Increase in with increase Net in Operating I unit Income Increase in contribution