Question

Norman Corporation produces and sells a single product. The unit selling price is $150 and variable expense per unit is $42. Total fixed expenses are $421,200. Enter answers using whole dollar amounts, no commas or dollar signs or decimals.

Determine the unit sales needed to earn a target profit of $21,600. ?

Determine the dollar sales needed to earn a target profit of $54,000 ?

Calculate the margin of safety in dollars for each target profit amount above ?

If the unit sales are 4,000 units, what is the degree of operating leverage? Round answer to one decimal place.

Answer 1

Answer of Part 1:

Contribution Margin per unit = Selling price per unit – Variable Cost per unit
Contribution Margin per unit = $150 - $42
Contribution Margin per unit = $108

Units Sales = (Fixed Expense + Target Profit) / Contribution Margin per unit
Units Sales = ($421,200 + $21,600) / $108
Units Sales = $442,800 / $108
Units Sales = 4,100

Required Sales = Units Sales * Selling Price
Required Sales = 4,100 * $150
Required Sales = $615,000

Answer of Part 2:

Contribution Margin Ratio = Contribution Margin per unit / Selling price per unit
Contribution Margin Ratio = $108 / $150
Contribution Margin Ratio = 0.72 or 72%

Required Sales in Dollars = (Fixed Cost + Target Profit) / Contribution margin ratio
Required Sales in Dollars = ($421,200 + $54,000) / 0.72
Required Sales in Dollars = $475,200 /0.72
Required Sales in Dollars = $660,000

Answer of Part 3:

If target Profit is $21,600:

Break Even Sales = Fixed Expense / Contribution Margin Ratio
Break Even Sales = $421,200 / 0.72
Break Even Sales = $585,000

Margin of Safety = Actual Sales – Break Even sales
Margin of Safety =$615,000 - $585,000
Margin of Safety = $30,000

If target Profit is $54,000:

Margin of Safety = Actual Sales – Break Even sales
Margin of Safety =$660,000 - $585,000
Margin of Safety = $75,000

Answer of Part 4:

Degree of Operating Leverage = Q(Selling Price – Variable Cost) / [Q *(Selling price – Variable Cost) –Fixed Cost]
Degree of Operating Leverage = 4,000 *($150 - $42) / [4,000*($150 - $42) - $421,200]
Degree of Operating Leverage = 4,000 * $108 / [4,000 * $108 - $421,200]
Degree of Operating Leverage = $432,000 / [$432,000 -$421,200]
Degree of Operating Leverage = $432,000 / $10,800
Degree of Operating Leverage = 40