Marjolein Co questions 15 PROBLEMS 618 Basic CVP Analysis o

PROBLEMS 6-18 Basic CVP Analysis olein & Co. makes a designer alarm clock that sells for $20 per unit. Variable costs are $6 per umit. (LOI,LO3, LO4, LOS, LO6, LO8) CHECK FIGURE fixed costs total $210,000 per year. Required: Answer the following independent questions: 1. What is the product\'s CM ratio? Use the CM ratio to determine the break-even point in sales dollars. e to an increase in demand, the company estimates that sales will increase by $200,000 during the next year. By how much should net operating income (or net operating loss) change, assuming that fixed costs do not change? 4. Assume that the operating results for last year were: 224,000 b6 21000 ,0 Contribution margin Net operating income ...14,000

Solution

Answer to Part 1.

CM Ratio = Contribution Margin / Sales * 100
Contribution Margin per Unit = Selling Price per unit – Variable Cost per Unit
Contribution Margin per Unit = $20 - $6 = $14

CM Ratio = 14 / 20 * 100
CM Ratio = 70%

Answer to Part 2.

Break Even Sales Dollars= Fixed Cost / CM Ratio
Break Even Sales Dollars = 210,000 / 0.70
Break Even Sales Dollars = $300,000

Answer to Part 3.

Net Operating Income will increase with Increase in Contribution Margin on increased Sales.

Increase in Net Operating Income = $200,000 * 0.70
Increase in Net Operating Income = $140,000

Answer to Part 4-a.

Degree of Operating Leverage = Contribution Margin / Net Income

Current Sales = $320,000 + $200,000 = $520,000
Current Contribution Margin = $520,000 * 70% = $364,000

Net Operating Income = Contribution margin – Fixed Expenses
Net Operating Income = $364,000 - $210,000
Net Operating Income = $154,000

Degree of Operating Leverage = 364,000 / 154,000
Degree of Operating Leverage = 2.36

Answer to Part 4-b.

Degree of Operating Leverage = % Change in Net Operating Income / % Change in Sales
2.36 = % Change in Net Operating Income / 5
% Change in Net Operating Income = 11.80%