Question

OBJECTIVE 4 5 Problem 4-34 Multiple Products, Break-Even Analysis, Operating Leverage Carlyle Lighting Products produces two different types of lamps: a floor lamp and a desk lamp. Floor lamps sell for $30, and desk lamps sell for $20. The projected income statement for the coming year follows: Sales Less: Variable costs Contribution margin Less: Fixed costs Operating income $600,000 400,000 200,000 150,000 $ 50,000 The owner of Carlyle estimates that 60 percent of the sales revenues will be produced by floor lamps and the remaining 40 percent by desk lamps. Floor lamps are also responsible for 60 per- cent of the variable expenses. Of the fixed expenses, one-third are common to both products, and one-half are directly traceable to the floor lamp product line. Required: 1. Compute the sales revenue that must be earned for Carlyle to break even. 2. Compute the number of floor lamps and desk lamps that must be sold for Carlyle to break even. 3. Compute the degree of operating leverage for Carlyle Lighting Products. Now assume that the actual revenues will be 40 percent higher than the projected revenues. By what percentage will profits increase with this change in sales volume? 4. CONCEPTUAL CONNECTION What is the theory behind the operating leverage concept? Check figures: 1. Revenue = $450,000 2. Desk lamps = 8,998 3. Operating leverage = 4.0

Complete Problem 4-34, and provide the required information.

Required:

1 - The sales revenue that must be earned for Carlyle to break even is ____ dollars

2 - HINT: first use your understanding of the % of desk lamps and the % of floor lamps to determine the sales mix. Once you have this information you can use this to calculate the basket contribution margin.

The basket contribution margin is ___ dollars

The number of floor lamps that must be sold for Carlyle to break even is ___ units

The number of desk lamps that must be sold for Carlyle to break even is _____ units

3 - The operating leverage is ___

The percentage change in profits is ____ percent

Answer 1

1.

Break even = 150,000 / 33.33% = $ 450,000

Note:

PV Ratio = Contribution / Sales * 100

= 200,000 / 600,000 * 100 = 33.33%

2.

Total basket contribution margin = $ 16.67

Break-even number of floor lamps = 9,000

Break-even number of desk lamps = 9,000

Calculations:

	Floor Lamp	Desk Lamp
Selling Price	$        30.00	$        20.00
Less: Variable Cost	$        20.00	$        13.33
Contribution	$        10.00	$          6.67
Sales mix	50%	50%
Weighted Contribution margin	$                                  8.33
Fixed cost	$                            150,000
Break-even point	18,000
Sale from each product	9,000	9,000

3.

Operating Leverage = Contribution / Operating Income

= 200,000 / 50,000 = 4

Change in profits = 40% * 4 = 160%