Question

King Peak Company produces one security door model. A partially complete table of its costs follows: Number of doors produced and sold 400 500 700 Total costs Variable costs $40,000 $? $? Fixed costs per year 65.000 ? Total costs 105,000 ? Cost per unit Variable cost per unit Fixed cost per unit Total cost per unit Required: 1. Complete the table. 2. King Peak sells its doors for $200 each. Prepare a contribution margin income statement for each of the three production levels in the table. 3. Based on these three statements and without any additional calculations), estimate King Peak's break-even point in units. 4. Calculate King Peak's break-even point in number of units and in sales revenue. 5. Assume King Peak sold 600 doors last year. Without performing any calculations, determine whether it earned a profit last year 6. Calculate the number of doors that King Peak must sell to earn a $10,000 profit 7. Calculate King Peak's degree of operating leverage if it sells 700 doors. 8. Using the degree of operating leverage, calculate the change in King Peak's profit if sales are 20 percent more than expected. (Assume costs did not change.)

Answer 1

Answer) 2) 1) 1 2 No.of Doors Produced and sold Variable cost Fixed cost Total Cost 400 40000 65000 105000 500 50000 65000 115000 700 70000 (100 per unit) 65000 (Fixed cost does not vary with production changes) 135000 Contribution margin statement Particulars 1) no .of units sales 2) sales value ((1) *200) 3) Less: Variable cost ( 1*100) 4) Contribution 5) Less: Fixed cost 6) Oparating Profit/(Loss) 3 4 Unit output level (working for 3 and 4) 400 500 700 600 650 80000 100000 140000 120000 130000 40000 50000 70000 60000 65000 40000 50000 70000 60000 65000 65000 65000 65000 65000 65000 -25000 15000 5000 -5000 5 6 Cost per unit Variable cost per unit Fixed cost per unit (3/1) Total cost per unit 100.00 162.50 262.50 100.00 130.00 230.00 100.00 92.86 192.86 3) Kings break even point would be 650 units because the trend was 10000 profit incresed from 400 level to 500 and 20000 gap from 500 to 700 as analytical estimation it be 650 Variable cost for 400 units Variable cost per unit 40000 40000/400 = 100 per unit 4) Caluculation of BEP BEP= Fixed cost / Contribution = 65000/ (200-100) = 650 units BEP in sales = 650*200= 130000 Verification : 650 cntribution = 650*100= 65000 Less: Fixed cost = 65000 Profit = 65000-65000 =0

5) at the level of 600 units company cant earn profit bacause it is less than the BEP sales i.e 650 units 6) desired profit sales =( Fixed cost + desired prfit / contribution per unit (65000+10000)/100 750 units 7) DOL = Qty * Selling price- variable cost)/((qty* (selling price-variable cost)-Fixed cost) (700*(200-100)/((700* (200-100)-65000) 14 %