Silky Smooth lotions come in two sizes: 4-ounce and 8-ounce bottles. The accompanying Excel file summarizes...
Silky Smooth lotions come in two sizes: 4-ounce and 8-ounce bottles. The accompanying Excel file summarizes the selling prices and variable costs per case of each lotion size.
Fixed costs are $300,000. Current production and sales are 4,000 cases of 4-ounce bottles and 8,000 cases of 8-ounce bottles. These relative proportions of sales of the two products represent the past three year’s average sales for Silky Smooth, as shown in its Contribution Margin Income Statement.
REQUIRED:
a. Calculate the break-even point in sales units, including the breakdown of the sales of each product.
b. Calculate the Degree of Operating Leverage (DOL) at the current sales volume and sales mix. (Use the total; don’t attempt to allocate fixed costs to the two products.)
c. Using your DOL in (b), compute the operating profit that would result from a 10% increase in sales from the current sales volume with the same sales mix.
d. On you Excel spreadsheet, prepare a data table for the breakeven volume and percentage change in the breakeven point from the current level, for each 1% change in the sales mix of 4-oz & 8-oz bottles, over the range of 35/65% to 45/55%, respectively (i.e., 4-oz range is 35-45%; corresponding 8-oz range is 65-55%.
- What does your analysis suggest?
e. Silky Smooth’s marketing director believes that by dropping the price of the 4-oz bottle from $38 to $36 (a 5.26% decrease), sales of the 4-oz bottles should increase by 15% over the current level, without impacting sales of 8-oz bottles. Project the operating profit that would result from this change.
| Per-Unit Amounts | 4-oz | 8-oz | |
| Sales Price | $ 38.00 | $ 66.00 | |
| Variable Costs | $ 13.00 | $ 24.50 | |
| 4-oz | 8-oz | Total | |
| Current Sales Volume (units) | 4,000 | 6,000 | 10,000 |
| Current Sales Mix | 40% | 60% | |
| Fixed Costs | $ 300,000 | ||
| Contribution Margin Income Statement, Current Sales & Production Levels | |||
| 4-oz | 8-oz | Total | |
| Sales Revenues | $ 152,000 | $ 396,000 | $ 548,000 |
| Variable Costs | $ (52,000) | $ (147,000) | $ (199,000) |
| Contribution Margin | $ 100,000 | $ 249,000 | $ 349,000 |
| Fixed Costs | $ (300,000) | ||
| Operating Income | $ 49,000 | ||
Homework Answers
a. Breakeven point Sales = 8596 (refer WN.1 (g))
b.DOL = 7.12 (Refer WN .1 (m))
W.N 1
| Particulars | 4-ounce | 8-ounce | Total | NOTES | |
| Sales Price | a | 38 | 66 | ||
| Variable Cost | b | 13 | 24.5 | ||
| Contribution | c | 25 | 41.5 | 66.5 | (a-b) |
| Sales mix | d | 40% | 60% | 100% | |
| Weighted Contribution | e | 10 | 24.9 | 34.9 | (c x d) |
| Total Fixed Cost | f | 3,00,000.00 | |||
| Breakeven point in sales units | g | 8,596.00 | (f/e) | ||
| Break even point in each product | h | 3438 | 5158 | 8,596.00 | |
| Sales Units | i | 4,000.00 | 6,000.00 | 10,000.00 | |
| Total Contribution | j | 100000 | 249000 | 3,49,000.00 | (c x i) |
| Total Fixed Cost | k | 3,00,000.00 | |||
| Operating Profit(Contribution - Fixed Cost) | l | 49,000.00 | |||
| Degree of operating leverage | m | 7.12 | (j / l) | ||
| 4400 | 6600 | 11000 |
| Breakeven point = | Total Fixed Cost /Weighted Average contribution | |
| Degree of operating leverage = (Sales - Variable Cost )/Sales- Variable cost-Fixed Cost) | ||
| or | = Contribution/Contribution-Fixed Cost | |
c.
| Degree of operating leverage = % change in net operating income/% change in sales | ||||
| Adopting this formula we can find out the operating profit resulting from 10% change in sales | ||||
| % of change in operating profit = Degree of operating leverage x % change in sales | ||||
| ;= 7.12 x 10% | = | 71.22% | ||
| So the new operating profit would be | ||||
| = 49000 x 171.22% | = | 83900 |
d)
| Particulars | Current Level | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |||||||||||||||||||||||
| 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | 4-ounce | 8-ounce | Total | ||
| Sales mix | 40 | 60 | 100 | 35 | 65 | 100 | 36.00 | 64 | 100 | 37 | 63 | 100 | 38 | 62 | 100 | 39 | 61 | 100 | 41 | 59 | 100 | 42 | 58 | 100 | 43 | 57 | 100 | 44 | 56 | 100 | 45 | 55 | 100 | |
| Sales units | 4000 | 6000 | 10,000.00 | 3500 | 6500 | 10,000.00 | 3600 | 6400 | 10,000.00 | 3700 | 6300 | 10,000.00 | 3800 | 6200 | 10,000.00 | 3900 | 6100 | 10,000.00 | 4100 | 5900 | 10,000.00 | 4200 | 5800 | 10,000.00 | 4300 | 5700 | 10,000.00 | 4400 | 5600 | 10,000.00 | 4500 | 5500 | 10,000.00 | |
| Weighted Contribution | 10 | 24.9 | 34.9 | 8.75 | 26.975 | 35.725 | 9 | 26.56 | 35.56 | 9.25 | 26.145 | 35.395 | 9.5 | 25.73 | 35.23 | 9.75 | 25.315 | 35.065 | 10.25 | 24.485 | 34.735 | 10.5 | 24.07 | 34.57 | 10.75 | 23.655 | 34.405 | 11 | 23.24 | 34.24 | 11.25 | 22.825 | 34.075 | |
| Breakeven point in sales units |
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