Question

Required:
1. Complete the table.

2. Ramada sells its carts for $1,050 each. Prepare a contribution margin income statement for each of the three production levels given in the table.

4. Calculate Ramada’s break-even point in number of units and in sales revenue.

5. Assume Ramada sold 1,000 carts last year. Without performing any calculations, determine whether Ramada earned a profit last year.

6. Calculate the number of carts that Ramada must sell to earn $30,000 profit.

7. Calculate Ramada’s degree of operating leverage if it sells 2,050 carts.

8. Using the degree of operating leverage, calculate the change in Ramada’s profit if sales are 10 percent less than expected.

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Answer 1

Answer to first 4 parts of the question: 1) Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. As a result, fixed costs in total remain constant at all levels of sales or production but per unit cost varies. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. As a result, variable costs per unit remain constant at all levels of sales or production but total cost varies. Case-1 1,500 Case-2 2,000 Case-3 2,500 Number of golf carts produced and sold Total costs: Variable costs Fixed costs per year Total costs Cost per unit: Variable cost per unit Fixed cost per unit Total cost per unit $630,000 $600,000 $1,230,000 $840,000 $600,000 $1,440,000 $1,050,000 (Case-1 = ($840000 / 2000) x 1500 = $630000; Case-3 = ($840000 / 2000) = $1050000] $600,000 (Remain fixed for all cases] $1,650,000 (Variable costs + Fixed costs per year] $420 $400 $820 $420 $300 $720 $420 [Case-1 = $630000 / 1500 = $420; Case-2 = $840000 / 2000 = $420; Case-3 = $1050000 / 2500 = $420] $240 [Case-1 = $600000 / 1500 = $400; Case-2 = $600000 / 2000 = $300; Case-3 = $600000 / 2500 = $240] $660 [Variable costs per unit + Fixed costs per unit]

Ramada Company Contribution Margin Income Statement Case-1 Case-2 Sales Revenue $1,575,000 $2,100,000 Less: Variable costs $630,000 $840,000 Contribution Margin $945,000 $1,260,000 Less: Fixed costs -$600,000 $600,000 Net Operating Income $345,000 $660,000 Case-3 $2,625,000 (Ref: NOTE] $1,050,000 [As calculated in Part-1] $1,575,000 $600,000 [As calculated in Part-1] $975,000 NOTE: Sales Revenue for Case-1 = 1500 units x $1050 = $1575000; Case-2 = 2000 units x $1050 = $2100000; Case-3 = 2500 x $1050 = $2625000. 4) Breakeven point sales, in units = Fixed costs per year / Contribution margin per unit Fixed costs per year Contribution margin per unit Breakeven point sales, in units $600,000 $630 [Seling price per unit - Variable cost per unit = $1050 - $420 = $630] 952.38 or = 952 [If rounded off to zero decimal plance]

Breakeven point sales, in dollars = Fixed costs per year / Contribution margin ratio Contribution margin per unit Selling price per unit Contribution margin ratio Fixed costs per year Breakeven point sales, in dollars $630 [Seling price per unit - Variable cost per unit = $1050 - $420 = $630] $1,050 0.60 ($630 / $1050] $600,000 $1,000,000 ($600000 / 0.6]