Question

04.(12 Marks) The following monthly budgeted data are available for the Data Management Company: Product C Sales $500,000 Variable expenses 300.000 Contribution margin $200,000 Product J $300,000 210,000 $90,000 Product R $900.000 720,000 $180,000 Budgeted operating income for the month is $220,000. Required: a) Calculate the break-even sales for the month. (8 Marks) b) Calculate the margin of safety. (2 Marks) c) Calculate the degree of operating leverage. (2 Marks)

Answer 1

Answer for Question 3 (a) Sales Selling Price per unit Units sold 75,000 15.00 5000 Selling Price per unit Variable expenses per unit (45000/5000) Contribution per unit Unit Sold Total Contribution (-) Fixed expenses Operating Loss 15.00 -9.00 6.00 5000 30,000 -36,000 $ $ -6,000 Fixed costs Contribution per unit 36,000 6.00 Break-even point (in unit sales) (Fixed Cost/Contribution per unit) 6,000 units (36000/6) The break-even point is 6,000 units. (b) At break even point, total variable expenses is $ 54,000 (6000*9).

(C) Target Operating income (+) Fixed expenses Required Contribution margin Contribution margin per unit Required no. of units sold 9,000 36,000 45,000 6.00 7,500 To earn target operating income of $ 9,000; 7,500 units are required to be sold. (d) Increase in total sales Selling price per unit Increase in units sold Contribution margin per unit Increase in contribution margin (1666.67*6) (-) Increase in advertising costs Increase in Net Operating Income 25000 15.00 1666.67 6.00 10,000 -6000 4,000 $ $ The increased advertising is preferable due to increase in net operating income.

Answer for Question 4 Sales (-) Variable expenses Contribution margin (-) Fixed costs Budgeted Operating Income Product C Product ) Product R Total $ 5,00,000 $ 3,00,000 $ 9,00,000 $ 17,00,000 $ -3,00,000 $ -2,10,000 $ -7,20,000 $ -12,30,000 2,00,000 $ 90,000 $ 1,80,000 $ 4,70,000 $ -2,50,000 $ 2,20,000 $ Total Contribution margin (-) Budgeted Operating Income Fixed costs uso 4,70,000 -2,20,000 2,50,000 Contribution margin Sales was 4,70,000 17,00,000 Contribution margin ratio (Contribution margin/Total Sales) 27.65% (470000/1700000) $ Fixed costs Contribution margin ratio 2,50,000 27.65% Break-even point in sales $) (Fixed Cost/Contribution margin ratio) $ 9,04,159 (250000/27.65%) The break-even point sales for the month is $ 904,159.

(b) Budgeted Operating Income Contribution margin ratio 2,20,000 27.65% Margin of Safety (in sales $) 7,95,660 (Budg. Operating Income/Cn margin ratio) (220000/27.65%) The Margin of Safety for the month is $ 795,660. (c) Contribution margin Budgeted Operating Income 4,70,000 2,20,000 Degree of Operating Leverage (Cn margin/Budg. Operating Income) 2.14 times (470000/220000)