MC | ||||
Present | ||||
1) | Amount | Per Unit | % | |
Sales | $ 12,04,000.00 | 28 | 100% | |
Variable Expenses($842800/43000) | $ 8,42,800.00 | 19.6 | 70% | |
Contribution Margin($361200/43000) | $ 3,61,200.00 | 8.4 | 30% | |
Fixed Expenses | $ 2,88,960.00 | |||
Operating Expenses | $ 72,240.00 | |||
Proposed | ||||
Amount | Per Unit | % | ||
Sales | $ 12,04,000.00 | 28 | 100% | |
Variable Expenses($19.6-$8.4) | $ 4,81,600.00 | 11.2 | 40% | |
Contribution Margin | $ 7,22,400.00 | 16.8 | 60% | |
Fixed Expenses | $ 6,50,160.00 | |||
Operating Expenses | $ 72,240.00 | |||
2a) | ||||
Present | ||||
Degree of Operating Leverage=Contribution Margin/Net Operating Income | ||||
Contribution Margin=(A) | $ 3,61,200.00 | |||
Net Operating Income=(B) | $ 72,240.00 | |||
Degree of Operating Leverage=(A)/(B) | 5 | |||
Proposed | ||||
Degree of Operating Leverage=Contribution Margin/Net Operating Income | ||||
Contribution Margin=(A) | $ 7,22,400.00 | |||
Net Operating Income=(B) | $ 72,240.00 | |||
Degree of Operating Leverage=(A)/(B) | 10 | |||
2b) | Dollar Sales to breakeven=(Fixed cost/Contribution Margin ratio) | |||
Present | ||||
Fixed Cost=(A) | 288960 | |||
Contribution Margin Ratio=(B) | 30% | |||
Dollar Sales to Breakeven=(A)/(B) | 963200 | |||
Proposed | ||||
Fixed Cost=(A) | 650160 | |||
Contribution Margin Ratio=(B) | 60% | |||
Dollar Sales to Breakeven=(A)/(B) | 1083600 | |||
2c) | Present | |||
Margin of Safety=Actual Sales-Breakeven Sales | ||||
Actual Sales=(A) | 1204000 | |||
Breakeven Sales=(B) | 963200 | |||
Margin of Safety=(A)-(B) | 240800 | |||
Maregin of Safety%=Margin of Safety in Dollars/Actual Sales | ||||
Margin of Safety=(A) | 240800 | |||
Actual Sales=(B) | 1204000 | |||
Margin of Safety %=(A)/(B) | 20.00% | |||
Proposed | ||||
Margin of Safety=Actual Sales-Break even Sales | ||||
Actual Sales=(A) | 1204000 | |||
Break even Sales=(B) | 1083600 | |||
Margin of Safety=(A)-(B) | 120400 | |||
Margin of Safety%=Margin of Safety in Dollars/Actual Sales | ||||
Margin of Safety=(A) | 120400 | |||
Actual Sales=(B) | 1204000 | |||
Margin of Safety %=(A)/(B) | 10.00% | |||
Ans 3) | New Equipment would results increase in contribution margin ratio, it would be beneficial for a company to install new equipment. | |||
Ans 4) | New Units sales(43000*1.30) | 55900 | ||
New Fixed Cost | $ 3,04,612.00 | |||
New Profit($72240*1.20) | $ 86,688.00 | |||
Unit Sales Price(same) | $ 28.00 | |||
Sales Value=(55900*$28) | $ 15,65,200.00 | |||
Variable Expenses | ? | |||
Profit=Sales-Variable cost-Fixed Cost | ||||
86688=1565200-Variable cost-304612 | ||||
Variable Expenses=1565200-304612-86688 | $ 11,73,900.00 | |||
New Contribution margin ratio | ||||
Sales Value= | $ 15,65,200.00 | 100% | ||
Variable Expenses | $ 11,73,900.00 | 75% | ||
Contribution margin | $ 3,91,300.00 | 25% | ||
Dollar sales to break even=(Fixed Cost/Contribution margin ratio)=($304612/25%) | $ 12,18,448.00 | |||
Present level of sales is $1204000 and Break even sales $1218448 which is higher then the present level of sales. | ||||
Dollar sales to attain target Profit=(Target Profit+Fixed Cost)/(Contribution Margin Ratio) | ||||
($72240+$304612)/25% | $ 15,07,408.00 | |||
Thus the sales would have to increase by 25% =(($1507408-1204000)/$1204000) in order to make the company better off with new strategy, but this situation is risky. |
1. New equipment has come onto the market that would allow Morton Company to automate a...
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Morton Company's contribution format income statement for last month is given below: Sales (15,000 units X $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $450,000 315,000 135,000 90,000 $ 45,000 The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits. Required:...
Morton Company’s contribution format income statement for last month is given below: Sales (15,000 units × $30 per unit) $450,000 Variable expenses 315,000 Contribution margin 135,000 Fixed expenses 90,000 Net operating income$45,000 1. New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $9 per unit. However, fixed expenses would increase to a total of $225,000 each month. Prepare two contribution format income statements, one...
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