Question

Klein Company distributes a high-quality bird feeder that sells for $55 per unit. Variable costs are $22 per unit, and fixed costs total $273,000 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. Break-even point in sales dollars 3. The company estimates that sales will increase by $61,000 during the coming year due to increased demand. By how much should operating income increase? Operating income increases by 4. Assume that the operating results for last year were as follows: Sales Variable expenses $1,100,000 736,000 Contribution margin Pixed expenses 364,000 273,000 Operating income $ 91,000

Answer 1

CM Ratio = CM/Sales	60.00%
2.Break even in sales dollars = Fixed costs/CM Ratio	455000
3.Operating income will increase by Increase in Sales*CM Ratio as fixed costs will remain constant
i.e. by 61000*60%	#######
4.a. Degree of Operating leverage = CM/Net Operating Income
4	Times
b.Operating income increases by % increase in sales*DOL
i.e. 10%*4 = 40%
36400
Revised Operating Income	127400
Units	29000	Units	34800	Units
	Total	Per unit	Total	Per unit
Sales revenue	1595000	55	1722600	49.5
Less: Variable costs	638000	22	765600	22
Contribution Margin	957000	33	957000	27.5
Less: Fixed costs	273000	9.413793103	338000	9.712643678
Net Operating Income	684000	23.5862069	619000	17.78735632
No, as Operating income will reduce
Total Contribution Margin	1131000
Less: Current Fixed costs	273000
Less: Desired Operating income	684000
Hence, maximum increase in advertising	174000