Question

Break-Even in Units, Target Income, New Unit Variable Cost, Degree of Operating Leverage, Percent Change in Operating Income Reagan, Inc., has developed a chew-proof dog bed-the Tuff-Pup. Fixed costs are $204,400 per year. The average price for the Tuff-Pup is $36, and the average variable cost is $22 per unit. Currently, Reagan produces and sells 20,000 Tuff-Pups annually. Required: 1. How many Tuff-Pups must be sold to break even? units 2. If Reagan wants to earn $95,900 in profit, how many Tuff-Pups must be sold? units Prepare a variable-costing income statement to verify your answer. Reagan, Inc. Variable-Costing Income Statement Sales Less: Variable cost Contribution margin Less: Fixed expenses Operating income

Answer 1

Answer:

1) Break even point = 204,400/(36-22) = 14600 Units
2) Required unit = (204400+95900)/(36-22) = 21450 Units
Regan Inc
Variable Costing Income Statement
	Amount($)
Sales(36*21450)	7,72,200
Less: Variable Cost(22*21450)	4,71,900
Contribution Margin	3,00,300
Less: Fixed expenses	2,04,400
Net operating Income	95,900

3) 12000 = 204400/(36-X)

4,32,000-12000X = 204400

-12000x=204400-432000

=-12000x = -227600

X(variable cost per unit ) = 18.97

4) Current contribution margin = 14*20000 = 280,000

Current operating income = 280000-204400 = 75,600

a)

Calculate Degree of operating leverage

Degree of operating leverage = Contribution Margin/Operating Income

Degree of operating leverage = (36-22)*20000/( (36-22)*20000-204400)

Degree of operating leverage = 280000/75600

Degree of operating leverage = 3.704

b)

If Sale increase by 10%

Percent Change in operating Income = Percentage Sale Increase * Degree of operating leverage

Percent Change in operating Income = 10%*3.704

Percent Change in operating Income = 37.04%

c)

New Total Operating Income = ( (36-22)*20000*1.1-204400)

New Total Operating Income = $ 103,600

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