Question

Problem4. CVP analysis Marjolein & Co. distributes a designer alarm clock that sells for $25.00 per unit. Variable costs are S9.00 per unit, and fixed costs total $1,800,000 per year Required Answer the following independent questions What is the product's CM ratio? Use the CM ratio to determine the break-even point in sales dollars. 2. Due to an increase in demand, the company estimates that sales will increase by S300,000 during the next year. By how much should net operating income (or net operating loss) change, assuming that fixed costs do not change? Assume that the operating results for last year were: Sales ariable expenses Contribution margin Fixed expenses S3,750,000 1.350,000 400,000 1,800,000 600,000 et operating income Compute the degree of operating leverage at the current level of sales. The president expects sales to increase by 7% next year. By what percentage should net operating income increase? 4 last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by S1.25 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 10%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. Refer to the original data. Assume again that the company sold 140,000 units

Answer 1

Requirement-1: Contribution Margin ratio Contribution Margin per unit /Selling price per unit Breakeven point, in dollars Fixed costs & expenses/ Contribution Margin ratio. Contribution Margin per unit Selling price per unit Contribution Margin ratio Fixed costs Breakeven point, in dollars $16 Selling price per unit- Variable cost per unit $25- $9 $16] $25 0.64 I$16/$25] $1,800,000 $2,812,500 I$1,800,000/0.64] Increase in net operating income Estimated increase in sales x Contribution Margin ratio $300,000 Estimated increase in sales Contribution Margin ratio Increase in net operating income 0.64 [As calculated in Requirement-1] $192,000 [S300,000 x 0.64]

Requirement-3 Degree of operating leverage Contribution margin / Net operating income Contribution margin Net operating income a Degree of operating leverage $2,400,000 $600,000 4[$2,400,000 $600,000] Percentage increase in net operating income-% Increase in Sales x Degree of operating leverage % Increase in Sales Degree of operating leverage b) Percentage increase in net operating income 796 4 28% (796 x 4] Requirement-4: Increase in # of units sold Selling price per unit Increase in sales, dollars Less: Increase in variable cost Less: Additional sales commission Incremental cash flow expected 14,000 [140,000 x10%) $25 $350,000 [14,000 x $25] $126,000 [14,000 x $9] -$17,500 $206,500 [14,000 x $1.25]