Question

QUESTION 1

Degree of Operating Leverage

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $100,500.

Required:

Calculate the degree of operating leverage. (Round your answer to the nearest tenth.)

__________

QUESTION 2

Margin of Safety

Head-First Company plans to sell 4,930 bicycle helmets at $66 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Break-even units equal 2,357.

Required:

1. Calculate the margin of safety in terms of the number of units.
________units

2. Calculate the margin of safety in terms of sales revenue.
$________

Answer 1

Question 1

Sales	$375,000 (5,000*$75)
Variable cost	$(225,000) (5,000*$45)
Contribution margin	$150,000
Fixed cost	$(49,500)
Operating income	$100,500

Degree of operating leverage = Contribution margin / Operating income

= $150,000 / $100,500

1.5 times

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Question 2

1. Margin of safety in units = Sales - Break even sales

= 4,930 - 2,357

= 2,573

2. Margin of safety = 2,573 * $66

= $169,818