Question

4. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this: 1 Chapter 3: Applying Excel 3 Data 4 Unit sales 5 Selling price per unit 6 Variable expenses per unit 7 Fixed expenses 48.000 units $40 per unit $16 per unit S720,000 (a) What is net operating income? (Negative amount should be indicated by a minus sign.) Net operating income loss) 432,000 (b) By what percentage did the net operating income increase? Percentage increase in net operating income 99 5. Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $13,000 and at that price, Thad estimates 600 units would be sold each year. The variable cost to produce and sell the cycles would be $9,750 per unit. The annual fixed cost would be $1,852,500. a. What is the break-even in unit sales? Break-even in unit sales 570 b. What is the margin of safety in dollars? Margin of safety in dollars S 390,000 c. What is the degree of operating leverage? (Round your answer to 2 decimal places.) Degree of operating leverage 0.05 Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $10,600 to compete effectively. In that event, Thad would also reduce fixed expenses to $1,649,500 by reducing advertising expenses, but he still hopes to sell 600 units per year. d. What would the net operating income be in this situation? (Negative amount should be indicated by a minus sign.) Net operating income (Loss) 11.139.500

Answer 1

48,000 units sales is after increasing 20%. Before that sales are 40,000 units (48,000 / 120% = 40,000)

Previous net operating income = [40,000 X ($40 - $16)] - $720,000 = $240,000

Current net operating income = $432,000

4.

(b)

Percentage increases increase in net operating income = ($432,000 X 100 / $240,000) - 100 = 80%

5.

(c)

Contribution margin = 600 X ($13,000 - $9,750) = $1,950,000

Net operating income = $1,950,000 - $1,852,500 = $97,500

Degree of operating leverage = $1,950,000 / $97,500 = 20

All the other answers are correct.