Question

HC Company manufactures different sizes of toys. The manager has just received the sales forecast for the coming year for the coming year for the two different products: small toys and big toys. HC Company went through different variations in sales volume and variable costs over the last couple of years. The forecast should be examined from a Cost-Volume-Profit (CVP) viewpoint. The information for 2019 is presented as:

	Small Toys	Big toys
Unit sales	80,000	120,000
Unit selling price	$36	$48
Variable manufacturing cost per unit	$12	$26
Variable selling cost per unit	$2	$4

For 2019, HC Company fixed factory overhead is $2,200,000 and fixed selling and admin expense are forecasted to be $800,000

1) Calculate the total dollar sales the company should sell in order to earn operating income of $1,200,000

2) Calculate Operating Leverage for 2019

Answer 1

		Small toys	Big toys
Sales volume in Units		80,000.00	120,000.00	(A)
Selling Price per unit		36.00	48.00	(B)
Total sales value in dollars		2,880,000.00	5,760,000.00
Variable Cost
		$	$
Manufacturing cost per unit		12.00	26.00
Selling cost per unit		2.00	4.00
Total variable cost per unit		14.00	30.00
Total variable cost		1,120,000.00	3,600,000.00
Contribution (sales -variable cost)		1,760,000.00	2,160,000.00
Total contribution in dollars	3,920,000.00
Fixed Costs
	$
Factory overhead	2,200,000.00
Selling and admin	800,000.00
Total fixed cost	3,000,000.00
PROFIT(Operting income -contribution-fixed cost) in $	920,000.00
Note:
This profit is for given sales volume of 80,000 and 120,000 units
total dollar sales the company should sell in order to earn operating income of $1,200,000
For 920,000 operating income, sales volume required is 8,640,000. For 120,000 operating income sales should be
11,269,565.22	(Sales value in dollars)
Operating Leverage
Operating Leverage=Contribution/Operating income
4.26
4.26 times