Exercise 37 Part Level Submission Julianna Abdallah owns and

Exercise 3-7 (Part Level Submission) Julianna Abdallah owns and operates FirstCakes, a bakery that creates personalized birthday cakes for a child\'s first birthday. The cakes, which sell for $64 and feature an edible picture of the child, are shipped throughout the country. A typical month\'s results are as follows Sales revenue1,121,280 Variable expenses Contribution margin Fixed expenses 840,960 280,320 134,720 Operating income 145,600 ? (a) Ø Your answer is correct. How many cakes will Julianna Abdallah have to sell if she wants to earn $179,392 in operating income each month? 19632 cakes

Solution

Solution 3-7a:

Contribution margin ratio = $280,320 / $1,121,280 = 25%

Target monthly operating income = $179,392

Target contribution margin = $179,392 + $134,720 = $314,112

Target sale to acheive target contribution margin = $314,112 / 25% = $1,256,448

Target cakes to be sole to achieve target operating income = $1,256,448 / $64 = 19632 cakes

Solution 3-7b:

Target income after tax = $101,920

Target income before tax = $101,920 / (1-Tax rate) = $101,920 / (1-0.30) = $145,600

Target contribution margin = $145,600 + $134,720 = $280,320

Target sale to acheive target contribution margin = $280,320 / 25% = $1,121,280

Target cakes to be sole to achieve target operating income = $1,121,280 / $64 = 17520 cakes

Solution 3-15 a:

Operating leverage = Contribution / Operating income = $260,920 / $118,600 = 2.2

Solution 3-15 b:

If sale revenue will increase by 5% then company net operating income will increase by = Increase in sales revenue * Operating leverage

= 5%*2.2 = 11%

Solution 3-15 c:

Company\'s new net operating income = Exisitng operating income * 111% = $118,600 *111% = $131,646

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