ADM 2341 Lecture Notes - Lecture 4: Contribution Margin, Operating Leverage, Budget

68 views15 pages

skycricket871

18 Dec 2015

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Problem 4-18 (60 minutes: the cm ratio is 60%: =,000 sales: ,000 increased sales 60% cm ratio = ,000 increased contribution margin. Since fixed costs will not change, operating income should also increase by ,000. a. = 4: 4 16% = 64% increase in operating income. In dollars, this increase would be 64% ,000 = ,600. * 23,000 units 1. 3 = 29,900 units. per unit (1 0. 12) = . 40 per unit. No, the changes should not be made since operating income decreases: expected total contribution margin: 23,000 units 150% per unit* ,000. Incremental contribution margin, and the amount by which advertising can be increased with operating income remaining unchanged =$ 545,366(rounded: the break-even point in units for the company as a whole would be: (1) (2) (3) (1) x (2) 525 units 2,100 (525 + 1,050 + 525) Mirrors: 1,050 units 2,100 (525 + 1,050 + 525) Vanities: 525 units 2,100 (525 + 1,050 + 525)

Related Questions

EXERCISE 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO5-1, L05-3, L05-5, L05-6, L05-7] Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit $30 Total $450,000 180,000 270,000 216,000 $ 54,000 Variable expenses ...... Contribution margin. Fixed expenses Net operating income ....... 12 Required: 1. What is the monthly break-even point in unit sales and in dollar sales? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3. How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target sales level. 4. Refer to the original data. Compute the company's margin of safety in both dollar and per- centage terms. 5. What is the company's CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

EXERCISE 6-16 Working with a Segmented Income Statement; Break-Even Analysis [L06-4, L06-5] Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classi- fies the direct costs of consulting jobs as variable costs. A contribution format segmented income statement for the company's most recent year is given below: Sales ........ Variable expenses .......... Contribution margin ........................... Traceable fixed expenses ....................... Office segment margin .............................. Common fixed expenses not traceable to offices ..... Net operating income ...... Total Company $450,000 100% 225,000 50% 225,000 50% 126,000 28% 99,000 22% 63,000 $ 36,000 8% Office Chicago Minneapolis $150,000 100% $300,000 100% 45,000 30% 180,000 60% 105,000 70% 120,000 40% 78,000 52% 48,000 $ 27,000 18% $ 72,000 24% -16% 1496 Required: 1. Compute the company wide break-even point in dollar sales. Also, compute the break-even point for the Chicago office and for the Minneapolis office. Is the company wide break- even point greater than, less than or equal to the sum of the Chicago and Minneapolis break-even points? Why? By how much would the company's net operating income increase if Minneapolis increased its sales by $75,000 per year? Assume no change in cost behavior patterns. 3. Refer to the original data. Assume that sales in Chicago increase by $50,000 next year and that sales in Minneapolis remain unchanged. Assume no change in fixed costs. a. Prepare a new segmented income statement for the company using the above format. Show both amounts and percentages. b. Observe from the income statement you have prepared that the contribution margin ratio for Chicago has remained unchanged at 70% (the same as in the above data) but that the segment margin ratio has changed. How do you explain the change in the segment mar- gin ratio?

PROBLEM 5-20 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales [LO5-1, L05-3, LO5-4, L05-5, LO5-6, L05-8] Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results: Sales (30,000 balls) ...... Variable expenses ...... Contribution margin .... Fixed expenses .. Net operating income ..... $750,000 450,000 300,000 210,000 $ 90,000 Required: 1. Compute (a) the CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. 2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains con- stant at $25, what will be the new CM ratio and break-even point in balls? 3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $90,000, as 5. last year? Refer again to the data in (2) above. The president feels that the company must raise the sell- ing price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year, what selling price per ball must it charge next year to cover the increased labor costs? Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls? Refer to the data in (5) above. a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage. c. If you were a member of top management, would you have been in favor of constructing the new plant? Explain. 6.

ADM 2341 Lecture Notes - Lecture 4: Contribution Margin, Operating Leverage, Budget

Document Summary

Get access

Related Documents

ADM 2341 Chapter Notes - Chapter 7: Contribution Margin, Fixed Cost, Earnings Before Interest And Taxes

Management and Organizational Studies 3199Y Lecture Notes - Lecture 4: Budget, Contribution Margin, Earnings Before Interest And Taxes

ACC 252 Lecture Notes - Lecture 4: Contribution Margin, Robust Statistics, Earnings Before Interest And Taxes

Related Questions