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     

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

Selling Price per unit = Sales / Number of units sold
Selling Price per unit = $150,000 / 3,000
Selling Price per unit = $50

Variable Cost per unit = Variable Expenses / Number of units sold
Variable Cost per unit = $90,000 / 3,000
Variable Cost per unit = $30

Answer g.

Selling Price per unit = $50

Variable Cost per unit = $30 + $5
Variable Cost per unit = $35

Fixed Expenses = $48,000 + $3,000
Fixed Expenses = $51,000

Number of units sold = 3,000 + 450
Number of units sold = 3,450

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $50 - $35
Contribution Margin per unit = $15

Net Operating Income = Contribution Margin per unit * Number of units sold - Fixed Expenses
Net Operating Income = $15 * 3,450 - $51,000
Net Operating Income = $750

Answer h.

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $50 - $30
Contribution Margin per unit = $20

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $48,000 / $20
Breakeven Point in unit sales = 2,400

Answer i.

Breakeven Point in dollar sales = Breakeven Point in unit sales * Selling Price per unit
Breakeven Point in dollar sales = 2,400 * $50
Breakeven Point in dollar sales = $120,000

Answer j.

Required Sales in units = (Fixed Expenses + Target Profit) / Contribution Margin per unit
Required Sales in units = ($48,000 + $54,000) / $20
Required Sales in units = 5,100

Answer k.

Margin of Safety in dollars = Sales - Breakeven Point in dollar sales
Margin of Safety in dollars = $150,000 - $120,000
Margin of Safety in dollars = $30,000

Answer l.

Margin of Safety in percentage = Margin of Safety in dollars / Sales
Margin of Safety in percentage = $30,000 / $150,000
Margin of Safety in percentage = 20%