Question

Cost-Volume-Profit Analysis P6-A Melon Company produces a knockoff watch that sells for $40 each. Variable costs are $12 each and fixed costs are $210,000 each year. Required: 1) What is this product's contribution margin ratio (CM %)? 2) What is this company's break-even point in sales dollars? 3) If sales increase $400,000, how much will net income increase (assuming they are operating within the relevant range and fixed costs do not change) ? 4) Assume 20,000 units were sold last year and Melon Company's income statement appeared as follows. Sales $ 800,000 Variable expenses 240,000 Contribution margin $ 560,000 Fixed expenses 210,000 Net income $ 350,000 a) Compute Melon Company's degree of operating leverage for last year. b) If sales are expected to increase 10% next year, by what percentage will net income increase? 5) Refer to the data at the top of this problem. a) Assume Melon sold 30,000 units last year. Prepare an income statement in contribution form. b) The president believes that a 10% reduction in sales price (which will not decrease their variable costs) and an increase of $90,000 in advertising (a fixed cost) will increase sales by 10,000 units. Prepare an income statement in contribution form. c) Would you recommend following the president's recommendations?

Answer 1

40 12 28 40 28 a. Contribution Margin Per Unit Sales Per Unit Less Variable Expenses per unit = 12000/1000 Contribution Margin per unit Note. Contribution Margin per unit=Sale per units - Variable Expenses per unit 1 Contribution Margin Ratio Sale price per unit Contribution margin per unit Contribution Margin Ratio Contribution Margin Ratio = Contribution per unit/Sales per unit*100 2 Break even point in $ sales Break even point in $ sales – Fixed expense/Contribution Margin Ratio Contribution Margin Ratio 210000/70% 3 If sales Icreases to 400000 Increasein Net income by(Contribution margin for $ 400000=400000* 70%) As Fixed cost already recovered from the present sales 70 % 70% 300000 280000

4 a) Degree of operating leverage Sales Less Variable Expenses Fixed cost Sales - Variable cost Sales - Variable cost- Fixed Cost Degree of operating leverage = Sales - Variable cost/Sales - Variable cost- Fixed Cost b) Sales increase by 10% increase in Net income Increase in operating income - Operating wil increase by 1.6 imes of increase in sales If sales Increase 10%, Operating wil increase by 16% 350000*16% 800000 240000 210000 560000 350000 1.6 56000

840000 630000 5a) If the sales were 30000 units Sales 30000*40 1200000 Less Variable costs 30000*12 -360000 Contribution Margin Less Fixed Costs -210000 Net Income b) 10% reduction in selling price, Increase in Fixed cost by 90000 and sales increase by 10000 units New Selling Price = 40 -10% of 40 = 40-4 Sales 30000*36 1080000 Less Variable costs 30000*12 Contribution Margin 720000 Less Fixed Costs 210000+90000 -300000 Net Income 36 -360000 420000 c) Presidents recommendation will be accepted as the profit will increase by 70000 from the Last year of 350000.

At a time 4 questions can only be answered, please split the questions,In future if you have more than 4 questions.please.