BUSACC 0040 Chapter Notes - Chapter 5: Operating Leverage, Earnings Before Interest And Taxes, Contribution Margin
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Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):
Sales | $ | 45,000 |
Variable expenses | 31,500 | |
Contribution margin | 13,500 | |
Fixed expenses | 8,640 | |
Net operating income | $ | 4,860 |
1. What is the contribution margin per unit? (Round your answer to 2 decimal places.) 2. What is the contribution margin ratio? 4. If sales increase to 1,001 units, what would be the increase in net operating income? (Round your answer to 2 decimal places.) 6. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income? 7. If the variable cost per unit increases by $1, spending on advertising increases by $1,350, and unit sales increase by 170 units, what would be the net operating income? 8. What is the break-even point in unit sales? 9. What is the break-even point in dollar sales? 10. How many units must be sold to achieve a target profit of $8,100? 11. What is the margin of safety in dollars? What is the margin of safety percentage? 12. What is the degree of operating leverage? (Round your answer to 2 decimal places.) 13. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? (Round your intermediate calculations and final answer to 2 decimal places.) |
Overview: Classifying a companyâs costs allows for an in-depthanalysis of the impact that changes in output have on revenues,costs, and net income or net loss. A cost-volume-profit (CVP)analysis will be completed in order to determine the breakevenpoint. Relevant costs will be used to prepare a flexible budget.Additionally, an appropriate costing system should be selected andthe choice should be substantiated with reasonable rationale.Finally, a memo should be prepared for management that summarizesthe results of the quantitative analysis and makes recommendationsfor an optimal costing system to be ethically used by key decisionmakers. For Milestone One, you will use the MDE ManufacturingBudget (Table I) to analyze costs, contribution margin, andbreakeven point for the bird feeder division of the company. In Tab1 of your Student Workbook, classify costs as either product orperiod costs. Briefly explain the difference between the types ofcosts. Then, analyze the actual costs and, using Tab 2 of yourStudent Workbook, complete a cost-volume-profit analysis todetermine how many bird feeders must be sold at the current costand sales price level to earn a 10% profit and how much the salesprice would have to increase to earn a 10% profit at the same costand sales volume level. Submit the Student Workbook with Tabs 1 and2 completed with your cost calculations and a 1â2 page Worddocument that explains the implications of your findings andaddresses all of the critical elements in Section I.
I. Salesand Manufacturing Expenses: Budget and Actual (2014)
You will use this table to complete Milestones One and Two.
Budget ($) | Actual ($) | |
Sales | 1,050,000 | 991,700 |
Expenses | ||
Materials â Cedar | 225,000 | 248,160 |
Materials â Plastic | 37,500 | 37,741 |
Factory Worker Labor | 300,000 | 332,760 |
Materials â Indirect | 3,000 | 2,585 |
Factory Depreciation | 78,000 | 78,000 |
Factory Utilities | 12,000 | 12,000 |
Factory Maintenance and Repairs | 5,000 | 4,500 |
Shipping ($2.25/each) | 112,500 | 105,750 |
Sales Commissions ($2.00/unitsold) | 100,000 | 94,000 |
Office Rent | 12,000 | 12,000 |
Advertising | 20,000 | 20,000 |
Liability insurance | 5,000 | 5,000 |
Office Depreciation | 1,000 | 1,000 |
Office Salaries | 48,000 | 48,000 |
Total Expenses | 959,000 | 1,001,496 |
II. Contribution Margin: Static Budget and Actual Results (2014)
You will use this table to complete Milestone Two.
Actual Results | Static Budget Amount | |
Units Sold | 47,000 | 50,000 |
Revenues ($) | 991,700 | 1,050,000 |
Manufacturing Costs ($) | ||
Variable | 621,246 | 565,500 |
Fixed | 94,500 | 95,000 |
Gross Margin | 275,954 | 389,500 |
Milestone One,Part I | ||
Product Costs | ||
Period Costs | ||
Totals | Totals | ||||||||||
Budget | Actual | ||||||||||
Sales Price per Unit | |||||||||||
Variable Costs | |||||||||||
Materials - Cedar | |||||||||||
Materials - Plastic | |||||||||||
Factory Worker Labor | |||||||||||
Materials - Indirect | |||||||||||
Shipping ($2.25/ea) | |||||||||||
Sales Commissions ($2/unit sold) | |||||||||||
Variable Cost per Unit | |||||||||||
Contribution Margin | |||||||||||
Fixed Costs | |||||||||||
Factory Depreciation | |||||||||||
Factory Utilities | |||||||||||
Factory Maintenance and Repairs | |||||||||||
Office Rent | |||||||||||
Advertising | |||||||||||
Liability Insurance | |||||||||||
Office Depreciation | |||||||||||
Office Salaries | |||||||||||
Total Fixed Costs | |||||||||||
Using Budgeted Amounts | |||||||||||
Breakeven Point - | Breakeven Point - | ||||||||||
Using Actual Amounts | Units at Current Sales Price | ||||||||||
+ 10,000 profit | |||||||||||
Using actual amounts | New Contribution Margin | ||||||||||
+ 10,000 profit | Current Variable Costs | ||||||||||
New Sales Price |