Answer 1.
Number of units sold = Sales / Selling Price per unit
Number of units sold = $2,240,000 / $80.00
Number of units sold = 28,000
Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $1,120,000 / $2,240,000
Contribution Margin Ratio = 50%
Answer 2.
Breakeven in dollar sales = Fixed Expenses / Contribution Margin
Ratio
Breakeven in dollar sales = $160,000 / 0.50
Breakeven in dollar sales = $320,000
Answer 3.
Increase in Sales = $59,000
Increase in Net Operating Income = Increase in Sales *
Contribution Margin Ratio
Increase in Net Operating Income = $59,000 * 50%
Increase in Net Operating Income = $29,500
Answer 4-a.
Degree of Operating Leverage = Contribution Margin / Net
Operating Income
Degree of Operating Leverage = $1,120,000 / $960,000
Degree of Operating Leverage = 1.17
Answer 4-b.
% Increase in Sales = 17.00%
Degree of Operating Leverage = % Increase in Net Operating
Income / % Increase in Sales
1.17 = % Increase in Net Operating Income / 17.00%
% Increase in Net Operating Income = 19.89%
Answer 5.
Selling Price per unit = $80.00 - 12% * $80.00
Selling Price per unit = $70.40
Variable Expense per unit = $40.00
Fixed Expenses = $160,000 + $70,000
Fixed Expenses = $230,000
Number of units sold = 28,000 + 25% * 28,000
Number of units sold = 35,000
No, the manager should not implement these changes as net operating income will decrease by $126,000 ($960,000 - $834,000).
Answer 6.
Selling Price per unit = $80.00
Variable Expense per unit = $40.00 + $1.70
Variable Expense per unit = $41.70
Let increase in advertising be $x
Fixed Expenses = $160,000 + $x
Number of units sold = 28,000 + 25% * 28,000
Number of units sold = 35,000
Net Operating Income = Sales - Variable Expenses - Fixed
Expenses
Net Operating Income = Selling Price per unit * Number of units
sold - Variable Expense per unit * Number of units sold - Fixed
Expenses
$960,000 = $80.00 * 35,000 - $41.70 * 35,000 - ($160,000 +
$x)
$960,000 = $2,800,000 - $1,459,500 - $160,000 - $x
$x = $220,500
Increase in advertising expense is $220,500.
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