Question

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Exercise 21-16 Break-even P2 Hudson Co. reports the contribution margin income statement for 2019 below. Using this information, compute Hudson Co.'s (1) break-even point in units and (2) break-even point in sales dollars. Contribution Margin income Statement For Year Ended December 31, 2019 Sales (9,600 units at $225 each Variable costs (9.600 units at $180 each Contribution margin Fixed costs... Pretax income $2.160,000 1.728.000 432.000 324.000 $ 108.000 Compute the company's degree of operating leverage for 2019. If sales decrease by 5% in 2020, what will be the company's pretax income? Assume sales for 2020 decrease by 5%. Prepare a contribution margin income statement for 2020

Answer 1

1) Break even unit = Fixed cost/Contribution margin per unit = 324000/(225-180) = 7200 Unit

Break even sales = 7200*225 = $1620000

2) Degree of operating leverage = 432000/108000 = 4 Times

3) Pretax income decrease by 4*5 = 20% = 108000*80% = 86400

4) Contribution margin income statement

Sales	2052000
Variable cost	1641600
Contribution margin	410400
Fixed cost	324000
Operating income	86400