Question

Laraia Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range.

   Sales (3,000 units)   $150,000     
   Variable expenses   90,000     
   Contribution margin   60,000     
   Fixed expenses   48,000     
   Net operating income   $12,000     
Required:
a. What is the contribution margin per unit?
b. What is the contribution margin ratio?
c. What is the variable expense ratio?
d. If sales increase to 3,050 units, what would be the estimated increase in net operating income?
e. If sales decline to 2,900 units, what would be the estimated net operating income?
f. If the selling price increases by $4 per unit and the sales volume decreases by 200 units, what would be the estimated net operating income?
g. If the variable cost per unit increases by $5, spending on advertising increases by $3,000, and unit sales increase by 450 units, what would be the estimated net operating income?
h. What is the break-even point in unit sales?
i. What is the break-even point in dollar sales?
j. Estimate how many units must be sold to achieve a target profit of $54,000.
k. What is the margin of safety in dollars?
l. What is the margin of safety percentage?
m. What is the degree of operating leverage?
n. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 15% increase in sales?

Answer 1

Answer to Requirement a.

Unit Contribution Margin = Unit Sales price – Unit Variable Cost
Unit Sales Price = Sales / Units Sold
Unit Sales Price = $150,000 / 3,000 = $50

Unit Variable Cost = Variable Expenses / Unit Sold
Unit Variable Cost = $90,000 / 3,000 = $30

Unit Contribution Margin = $50 - $30
Unit Contribution Margin = $20

Answer to Requirement b.

Contribution Margin Ratio = Unit Contribution Margin / Unit Sales Price * 100
Contribution Margin Ratio = $20 / $50 * 100
Contribution Margin Ratio = 40%

Answer to Requirement c.

Variable Expense Ratio = Unit Variable Expense / Unit Sales Price * 100
Variable Expense Ratio = $30 / $50 * 100
Variable Expense Ratio = 60%

Answer to Requirement d.

Net Operating Income = Contribution Margin – Fixed Expenses
Net Operating Income = ($20 * 3,050) - $48,000
Net Operating Income = $61,000 - $48,000
Net Operating Income = $13,000

Answer to Requirement e.

Net Operating Income = Contribution Margin – Fixed Expenses
Net Operating Income = ($20 * 2,900) - $48,000
Net Operating Income = $58,000 - $48,000
Net Operating Income = $10,000