Question

Question 1: Talal Industries developed the following information for the product it sells: $ $ of total Sales Variable cost of goods sold Fixed cost of goods sold Variable selling costs Variable administrative costs Fixed selling Fixed adminstrative costs Selling price Sales 23.00 800,000 10% 2.00 500,000 300,000 $ S $ 50 100,000 Units "rended December 31, 2017, the company produced and sold 100,000 units of product For the year ended Decem Instructions (a) Prepare a CVP income state 2017. VP income statement using the contribution margin format for Talal Indu What was the company's break-even etermine the Contribution Margin in unit and ratio. ompany's break-even point in units and dollar values in 2017? was the company's margin of safety and degree of Operating Leverage in de

answer with an explanation

Answer 1

(a). CVP Income statement using the contribution margin format for Talal Industries (2017)

Amount in ($)

Sales.    50,00,000

Less : Variable expenses:

Cost of goods sold 23,00,000

Selling cost. 5,00,000

Administrative cost 2,00,000

Total variable expenses. 30,00,000

_________________

Contribution margin. 20,00,000

Less. : Fixed expenses

Cost of goods sold . 8,00,000

Selling cost.    5,00,000

   Administrative cost. 3,00,000

Total fixed expenses. 16,00,000  

________________

Net Income / Operating income       4,00,000

(b) . Contribution margin in unit

Contribution margin pu = sales price p. u  - variable cost p.u.

= $ 50 - $ 30

= $ 20

Working :

Variable cost p. u. = cost of goods sold = $ 23

Selling cost . = $ 5 (10% of 's. p.)

Administrative cost = $ 2

Total. = $ 30

Contribution margin ratio = contribution margin / Sales X 100

= $ 20,00,000 / $ 50,00,000 X 100

= 40 %

(c). Break-even point in units = Fixed cost / Contribution. margin p. u.

= $ 16,00,000 / $ 20

= 80,000 units

Break-even point in dollars = Break-even point in units x sales price p. u.

= 80,000 units x $ 50

= $ 40,00,000

(d). Margin of safety in dollars :

= Actual Sales - Break-even Sales

= $ 50,00,000 - $ 40,00,000

= $ 10,00,000

Degree of operating leverage :

= Contribution margin / operating income

= $ 20,00,000 / $ 4,00,000 = 5 times

Analysis : If sales revenue changes by a certain percentage,

operating income will change by 5 times the percentage change in sales.