Management and Organizational Studies 3199Y Lecture Notes - Lecture 2: Contribution Margin, Operating Leverage, Earnings Before Interest And Taxes

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 3199Y
• Professor: hawn

Document Summary

Start by computing number of units sold in june. July is 10% higher than june, so divide july by 1. 10. 33,000 / 1. 10 = 30,000. (note: 30,000 x 10% increase = ,000) Next use margin of safety to compute june sales in dollars. Margin of safety in dollars = total sales - ,000. Margin of safety in percent = 20% = If margin of safety is 20%, then break-even must be 80% of total sales. Total sales = ,000 / . 80 = ,000. The selling price per unit must then be: ,000 / 30,000 units = . 50 per unit. Operating leverage can now be used to determine the contribution margin for june. Note that a 10% increase in sales resulted in a 50% increase in operating income. This 50% increase means operating leverage must be 5. Contribution margin for june must have been 5 x ,000 = ,000. From this, the rest of the data can be computed.