1075000 645000 430000 387000 Operating income S 43000 by 10

$1,075,000 645,000 430,000 387,000 Operating income S 43,000 by $10 per unit. Selling price would not change. Prepare two FRIEDEN C Per Unit Per Unit

Solution

1) Let us first calculate the variable cost per unit as per current scenario:-

Sales (43,000) - 1,075,000 (25 per unit)

Variable expenses - 645,000 (15 per unit)

So, with the proposed change variable expense will reduce by $ 10. So, new variable expense will be $ 5.

2) (a)Degree of operating leverage:-

Present = (Sales - VC)/EBIT * 100

= (10)/1 * 100

= 10

Proposed = (Sales - VC)/EBIT * 100

= (20)

= 20

(b) Break even point in dollars:-

Present = Fixed expenses/Contri margin %

= 387,000/40%

= 967,500

Proposed = Fixed expenses/Contri margin %

= 817,000/80%

= 1,021,250

(c) Margin of safety in dollars:-

Present = Sales - Break even point

= 1075000 - 967500

= 107500

Proposed = Sales - Break even point

= 1075000 - 1021250

= 53750

Margin of safety %

Present = (Actual sales - BEP)/Actual sales * 100

= 107500/1075000*100

= 10%

Proposed = (Actual sales - BEP)/Actual sales * 100

= 53750/1075000*100

= 5%

3a) The unit sales where it will be indifferent will be :-

Cost Indifference Point = Differential Fixed Cost / Differential variable cost per unit

Cost Indifference Point = (817000-387000)/(15-5)

= 430000/10

= 43000 units.

3b) Yes.

At the point of 43000 units of sales, he should be indifferent to choose any of the plan. He should go for the major expansion because once the sales unit goes beyond 43000, he will have more profits with the expansion.

3c) In this case,

The indifference point is 43,000 units

of sales at which point the upgrade is 1 unit

So, frieden\'s should proceed with the expansion.

4a) New operating income if the advertisement expense will be 30000, sales will increase by 10%

So, new sales = 43000 * 110% = 47,300

= Contribution - Fixed expenses

= 473,000 - (387,000+30,000)

= 473,000 - 417,000

= $ 56,000

4b) Yes, they should go for the advertisement campaign since it will increase the number of units of sales as well as the gross profit.

		Present			Proposed
	Amount	Per unit	%	Amount	Per unit	%
Sales	1075000	25	100%	1075000	25	100%
Variable Expenses	645000	15	60%	215000	5	20%
Contribution	430000	10	40%	860000	20	80%
Fixed expenses	387000	9		817000	19
Gross Profit	43000	1		43000	1