Question

The following CVP income statements are available for Oldham Company and Newton Company:

		Oldham Company			Newton Company
Sales revenue		$435,000			$435,000
Variable costs		261,000			87,000
Contribution margin		174,000			348,000
Fixed costs		124,000			298,000
Operating income		$50,000			$50,000

Calculate the break-even point in dollars and the margin of safety ratio for each company. (Round break-even point to the nearest whole dollar, e.g. 5,275 and margin of safety ratio to 2 decimal places, e.g. 15.25%.)

		Oldham Company		Newton Company
Break-even point		$		$
Margin of safety ratio			%		%

Calculate the degree of operating leverage for each company. (Round answers to 2 decimal places, e.g. 15.25.)

Oldham Company
Newton Company

Assuming that sales revenue increases by 20%, prepare a variable cost income statement for each company.

		Oldham Company		Newton Company
Fixed costsVariable costsContribution marginOperating incomeSales		$		$
Operating incomeFixed costsContribution marginVariable costsSales
Variable costsContribution marginOperating incomeSalesFixed costs
AddLess:                                                                       SalesVariable costsOperating incomeFixed costsContribution margin
Operating incomeSalesFixed costsContribution marginVariable costs		$		$

Assuming that sales revenue decreases by 20%, prepare a variable cost income statement for each company. (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Oldham Company		Newton Company
Fixed costsSalesVariable costsContribution marginOperating income		$		$
Operating incomeFixed costsContribution marginVariable costsSales
Operating incomeFixed costsSalesContribution marginVariable costs
LessAdd:                                                                       Variable costsContribution marginFixed costsOperating incomeSales
Fixed costsSalesContribution marginOperating incomeVariable costs		$		$

Answer 1

Calculate the break-even point in dollars and the margin of safety ratio for each company. (Round break-even point to the nearest whole dollar, e.g. 5,275 and margin of safety ratio to 2 decimal places, e.g. 15.25%.)

		Oldham Company		Newton Company
Break-even point		$124000/.40 = $310000		$298000/.80 = 372500
Margin of safety ratio		435000-310000/435000 = 28.74	%	435000-372500/435000 = 14.37	%

Calculate the degree of operating leverage for each company. (Round answers to 2 decimal places, e.g. 15.25.)

Oldham Company	174000/50000 = 3.48
Newton Company	348000/50000 = 6.96

Assuming that sales revenue increases by 20%, prepare a variable cost income statement for each company.

		Oldham Company		Newton Company
	Sales	$522000		$522000
	Variable cost	313200		104400
	Contribution margin	208800		417600
	Fixed cost	124000		298000
	Operating income	$84800		$119600

Assuming that sales revenue decreases by 20%, prepare a variable cost income statement for each company. (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Oldham Company		Newton Company
Sales		$348000		$348000
Variable cost		208800		69600
Contribution margin		139200		278400
Fixed cost		124000		298000
Net operating income		$15200		-19600