Question

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	$	105,000
Variable expenses		73,500
Contribution margin		31,500
Fixed expenses		27,720
Net operating income	$	3,780

Foundational 5-5

A. If sales decline to 900 units, what would be the net operating income?

B. 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?

C.  If the variable cost per unit increases by $1, spending on advertising increases by $1,950, and unit sales increase by 290 units, what would be the net operating income?

D. What is the break-even point in unit sales?

E. What is the break-even point in dollar sales?

F.  How many units must be sold to achieve a target profit of $18,900?

Answer 1

A)

If sales is 900 units

Contribution margin =( 31,500/1,000)*900 = $28,350

Fixed cost =27,720

Net operating income = $630

B)

Selling price per unit = 105,000/1,000 = $105

Variable cost per unit = 73,500/1,000 = $73.50

Increased selling price = 105 + 2 = $107

Sales volume = 900 units

Sales = 900*107 = 96,300

Variable cost = 900*73.50 = 66,150

Contribution margin = $30,150

Fixed cost = 27,720

Net operating income = $2,430

C)

Revised variable cost = 73.50 + 1 = 74.50

Sales = 1,290*105 = 135,450

Variable cost = 1,290*74.50 =96,105

Contribution margin = 39,345

Fixed cost = 27,720 + 1,950 = 29,670

Net operating income = $9,675

D)

Breakeven point = Fixed cost/ contribution margin per unit

Contribution margin per unit = 31,500/1,000 = $31.50

Breakeven in units

= 27,720/31.50

= 880 units

E)

Contribution margin ratio =Contribution margin/ sales

= 31,500/105,000

= 30%

Breakeven point in dollar sales = Fixed cost/ Contribution margin ratio

= 27,720/30%

= $92,400

F)

Target profit = $18,900

Number of units to be sold to achieve profit

= ( Fixed cost + Target profit)/ contribution margin per unit

= ( 27,720 + 18,900)/31.50

= 1,480 units .

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