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# COMMERCE 2AB3 Lecture Notes - Lecture 4: Operating Leverage, Variable CostExam

Department
Commerce
Course Code
COMMERCE 2AB3
Professor
Mohamed Shehata
Study Guide
Final

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Tutorial 4
Problem 1:
At the end of 2017, ABC Co. provided the following information for its activities during 2017.
Sales (5700 units) \$228,000
Contribution Margin 96,900
Net Income 11,900
Required
1. Calculate the BEP in units for ABC Co. for 2017.
2. Calculate the Margin of Safety for 2017 in units and in ratio.
3. If the manager believes that sales in 2018 are expected to increase by 40% over 2017 sales.
Calculate the expected change in NI for 2018 using the degree of operating leverage (DOL)
approach.
Problem 2
Ruben Corporation manufactures and sells T-shirts imprinted with college names and slogans. In
2014, the shirts sold for \$8 each, and the variable cost to manufacture them was \$5 per unit. The
company needed to sell 10,000 shirts to break even. The net income in 2014 was \$6,000. Ruben's
expectations for 2015 include the following:
The sales price will be increased to \$10 per unit
Variable costs to manufacture will decrease by 20%
Fixed advertising will increase by \$9,600
What should be the change in T-Shirts sold in 2015 after the above changes are implemented in
order to maintain at least the same net income as 2014?
MCQ:
1. In the fiscal year just completed, Varsity Shop reported net income of \$24,000 on revenues of
\$300,000. The variable cost ratio is70%. The income tax rate is 40%. What is the amount of fixed costs?
a. \$30,000
b. \$50,000
c. \$66,000
d. \$170,000
2. Product Cott has revenues of \$200,000, a contribution margin of 20%, and a margin of safety of
\$80,000. What are Cotts fixed costs?
a. \$16,000
b. \$24,000
c. \$80,000
d. \$96,000
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