Question

2 alue 10.00 points Problem 8-5 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales (LO1- CC2, 3; LO2 CC5, 6,7) Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $32. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totaling $22.40 per skateboard, of which 70% is direct labour cost. Over the past year the company sold 52,000 skateboards, with the following operating results: Sales (52,000 skateboards) Variable expenses $1,664,000 1,164,800 Contribution margin Fixed expe 499,200 422,400 ses Net operating income $ 76,800 Management is anxious to maintain and perhaps even improve its present eel of income from the skateboards. Required 1a. Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Contribution margin Unit sales to break-even point 30 | % 44,000 skateboards b. Compute the degree of operating leverage at last year's level of sales. (Round your answer to 2 decimal places.) Degree of operating leverage 6.50 2. Due to an increase in labor rates, the company estimates that variable costs will increase by $1.60 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $32.00, what will be the new CM ratio and the new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number.) Contribution margin Unit sales to break-even point 25% 52,800 skateboards 3. Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $76,800, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Number of skateboards 62,400 4. Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Selling price $34.29 5. Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 20%, but it would cause fixed costs to increase by 70%. If the new plant is built, what would be the company's new CM ratio and new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number.) Contribution margin Unit sales to break-even point 49 % skateboards 6. Refer to the data in (5) above a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $76,800, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Number of skateboards b-1.Assume that the new plant is constructed and that next year the company manufactures and sells 52,000 skateboards (the same number as sold last year). Prepare a contribution format income statement. (Input all amounts as positive values except losses which should be indicated by minus sign.) Contribution Income Statement Sales Variable expenses Contribution margirn Fixed expenses Net operating income (loss) $ 1,664,000 819,000 732,160 $ 732,160 b- Compute the degree of operating leverage. (Round your answer to 2 decimal places.) 2. Degree of operating leverage

Answer 1

Req 5	Selling price per unit				32
	New variable cost		(22.4*80%)		17.92
	Contribution per unit				14.08
	fixed expense   = 422400*170%=				718080
	contribution margin ratio				44.00%
	unit sales to break-even				51000	balls
Req 6A	number of balls				56455	balls
	(718080+76800)/14.08
Req6B	Contribution income statement
	Sales	(52000*32)			1664000
	Variable expenses (52000*17.92)				931840
	Contribution margin				732160
	Fixed expenses				718,080
	Net operating income				14,080
	Degree of operating leverage					52.00
	(contribution margin/net income)