Question

Contribution margin... Fixed expenses... Operating income..... 38.000 SI0.000 Required: 1. Compute the company's degree of operating leverage. 2. Using the degree of operating leverage, estimate the impact on operating income of a 5% increase in sales 3. Verify your estimate from (2) above by constructing a new contribution format income statement for the company, assuming a 5% increase in sales. EXERCISE 1-9 Compute the Break-Even Point for a Multi-Service Company: Compute Sales for a Target Profit L06, L09] Gulf Shore Lawn and Garden Maintenance provides two general outdoor services: lawn maintenance and garden maintenance. The company charges customers $15 per hour for each type of service, but lawn maintenance has higher variable costs (S7 per hour) than garden maintenance (53 per hour) be- cause of fuel expenses incurred to operate lawn mowing equipment. All employees are paid a fixed monthly salary. A contribution format income statement for a recent month for the two services appears below. During the month, 6,000 hours of lawn maintenance services and 2,000 hours of garden mainte- nance were provided. Total Lawn Per Garden Per Maintenance Hour Maintenance Hour $90,000 S15 $30,000 $15 42,000 6,000 $48.000 $24,000 Sales .... Variable expenses ........ Contribution margin ...... Fixed expenses ....... Operating income... $8 $12 $120,000 48,000 72.000 54,000 $ 18,000 Required: 1. Compute the overall CM ratio for the company. 2. Compute the overall break-even point for the company in sales dollars. 3. Compute the weighted average CM per hour for the company. 4. Calculate the overall break-even point for the company in hours. 5. Ar the overall break-even point in total hours, how many hours of each service must be provided for the company to break even? 6. Calculate the overall sales in dollars required to earn an after-tax profit of $42,000 if the tax rate is 30%.
Question #4-9

Answer 1

1	Overall CM ratio for company	=	Contribution/Sales
		=	$ 120000/ $ 72000
		=	60%
2	Overall Break-even point	=	Fixed Cost/ contribution margin ratio
		=	$ 54000/0.6
		=	$          90,000
3	Weighted Average CM per hour for the company (WACM)	=	Combined Contribution Margins / Total no. of hours provided
		=	$ 72000/(6000 + 2000)hrs
		=	$ 72000 / 8000 hrs
		=	$                     9	per hour
4	Overall Break-even point in hours	=	Fixed Expenses / WACM
		=	54000 / 9
		=	6000 hrs
5	Each service hours to be provided to break even at overall break even point
	LM service hours to be provided	=	6000 hrs * (6000 LMS hrs/ 8000 total hrs )
		=	6000 hrs * 0.75
		=	4500 hrs
	GM service hours to be provided	=	6000 hrs * (2000 GMS hrs/ 8000 total hrs )
		=	6000 hrs * 0.25
		=	1500 hrs
6	Sales Required	=	[Profit before Tax + fixed Expenses]/ overall CM ratio
		=	[($ 42000/0.70)+ 54000]/0.60
		=	$        190,000
	Income Statement
	Sales		$        190,000
Less	Variable Cost		$        (76,000)
	Contribution Margin		$        114,000
Less	Fixed cost		$        (54,000)
	Operating Income before tax		$          60,000
Less	Tax 30%		$        (18,000)
	Profit After Tax		$          42,000