Question

Break-Even in Units, Target Income, New Unit Variable Cost, Degree of Operating Leverage, Percent Change in Operating Income

Reagan, Inc., has developed a chew-proof dog bed—the Tuff-Pup. Fixed costs are $208,000 per year. The average price for the Tuff-Pup is $36, and the average variable cost is $23 per unit. Currently, Reagan produces and sells 20,000 Tuff-Pups annually.

Required:

1. How many Tuff-Pups must be sold to break even?
units

2. If Reagan wants to earn $71,500 in profit, how many Tuff-Pups must be sold?
units

Prepare a variable-costing income statement to verify your answer.

Reagan, Inc.
Variable-Costing Income Statement
	$
	$
	$

3. Suppose that Reagan would like to lower the break-even units to 10,400. The company does not believe that the price or fixed cost can be changed. Calculate the new unit variable cost that would result in break-even units of 10,400. If required, round your intermediate computations and final answer to the nearest cent.
$

4. What is Reagan’s current contribution margin and operating income?

Current contribution margin	$
Current operating income	$

Calculate the degree of operating leverage. Round your answer to three decimal places.

If sales increased by 10 percent next year, what would the percent change in operating income be? Use your rounded answer to the question above in your computations, and round your final percentage answer to two decimal places (for example, 45.555% would be entered as "45.56").
%

What would the new total operating income for next year be? Round your answer to the nearest dollar.
$

Answer 1

B4 - A B C F G H I K L contribution margin per unit = $36 - $23 = $13 i 2 break even units = $208,000/ $13 = units required = ($208,000+$71,500) / $13 = 16,000 21,500 sales revenue Variable-Costing Income Statement sales revenue $ 774,000 less: variable costs $494,500 contribution margin $ 279,500 less: fixed costs $ 208,000 net profit $71,500 new contribution margin per unit = $208,000 / 10,400 = new unit variable cost = $36 - $20 = $ 20 $ 16 Current contribution margin $ 260,000 Current operating income $ 52,000 degree of operating leverage = contribution margin / operating income degree of operating leverage = 50 % If sales increased by 10 percent next year, the percent change in operating would income be the new total operating income for next year would be $ 78,000

for formulas and calculations, refer to the image below -

1 x fc 1 F G H I J K L contribution margin per unit = $36 - $23 = $13 break even units = $208,000 / $13 = units required = ($208,000+$71,500) / $13 = =208000/13 = (208000+71500)/13 sales revenue Variable-Costing Income Statement sales revenue =21500*36 less: variable costs =21500*23 contribution margin =D9-D10 less: fixed costs 208000 net profit =D11-D12 new contribution margin per unit = $208,000/ 10,400 = new unit variable cost = $36 - $20 = =208000/10400 =36-20 4 Current contribution margin =13*20000 Current operating income =D18-208000 degree of operating leverage = contribution margin / operating income degree of operating leverage = =D18/D19 =10*E22 % If sales increased by 10 percent next year, the percent change in operating would income be the new total operating income for next year would be =D19*150%

In case you have any query, kindly ask in comments.