Question

GymShark Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): $ Sales Variable expenses Contribution margin Fixed expenses Net operating income 105,000 73,500 31,500 27,720 3,780 $ Required: 1. What is the break-even point in dollar sales? 2. How many units must be sold to achieve a target profit of $18,900? 3. What is the degree of operating leverage?

Answer 1

Fixed Cost / Contribution Margin ratio Requirement (1) Break Even Point in sales dollars 27720 / 30% $ 92,400 Note : Selling Price Less : Variable cost Contribution Margin $ $ $ 105,000 (73,500) 31,500 Contribution Margin ratio = 31500/105000*100 = 30% Requirement (2) Units to be sold to attain target profit of $ 18900 = (Fixed cost + Target Profit ) / Unit contribution Margin (27720+18900)/31.5 1480 Units Note : Unit contribution margin = 31500/1000 unit = $31.50 Requirement (3) Degree of Operating Leverage = Contribution Margin / Net Income 31500/3780 8.33 Times Note : Please comment down for any further clarifications.