Question

Derst Incorporated sells a particular textbook for $25. Variable expenses are $13 per book. At the current volume of 42,000 books sold per year the company is just breaking even. Given these data, the annual fixed expenses associated with the textbook total: Multiple Choice $546,000 $1,050,000 $504,000 $1,554,000

Answer 1

Answer- The annual fixed expenses associated with the textbook total = $504000

Explanation- Break-even point on units = Fixed expenses/ Contribution margin per unit

42000 units = Fixed expenses/ $12 per unit

Fixed expenses = 42000 units*$12 per unit

= $504000

Where- Contribution margin per unit = Selling price per unit – Variable expense per unit

= $25 per unit - $13 per unit

= $12 per unit

Answer- The degree of operating leverage is = 5.20.

Explanation- Degree of operating leverage= Contribution margin/ Net Operating income

= $52000/$10000

= 5.20 times

Where- Net operating income = Contribution margin -Fixed costs                                                              

= $52000 -$42000

= $10000

Where- Contribution margin = (1600 units*$50 per unit)*(1.00 – 0.35)

= $52000

Answer- The overall effect on the company’s monthly net operating income of this change = increase of $10000.

Explanation- Increase in net operating income = (Increase units sold * Contribution margin per unit) – Increase in fixed costs

= (190 units*$90 per unit) - $7100

= $10000