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	$	25,000
Variable expenses		17,500
Contribution margin		7,500
Fixed expenses		4,200
Net operating income	$	3,300

1.  What is the contribution margin per unit? (Round your answer to 2 decimal places.)

2. What is the contribution margin ratio?

3. What is the variable expense 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.)

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

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 $1,150, and unit sales increase by 130 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 $4,500?

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.)

14. Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $4,200 and the total fixed expenses are $17,500. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage? (Round your answer to 2 decimal places.)

15. Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $4,200 and the total fixed expenses are $17,500. Given this scenario and assuming that total sales remain the same. Using the degree of calculated 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.)

Answer 1

1)Contribution Margin Per Unit = Total Contribution Margin/ Total no. of Units

= $7,500/1,000 units

= $7.5 per unit

2)Contribution Margin Ratio = (Total Contribution Margin/ Sales)*100

= ($7,500/$25,000)*100

= 30%

3)Variable Expense Ratio = (Variable Expense/Sales)*100

= ($17,500/$25,000)*100

= 70%

4)Contribution Format Income Statement showing per units figures:

	1,000 units (A)	Per unit (A/1,000)
Sales	25,000	$ 25.0
Less: Variable expenses	17,500	17.5
Contribution margin	7,500	7.5
Less: Fixed expenses	4,200
Net operating income	3,300

Contribution Income Statement when Sales are 1,001 units:

	$
Sales ($25*1,001 units)	25,025
Less: Variable expenses ($17.5*1,001 units)	17,517.5
Contribution margin	7,507.5
Less: Fixed expenses	4,200
Net operating income	3,307.5

The Net Operating Income increased by $7.5.

5) Contribution Income Statement when Sales are 900 units:

	$
Sales ($25*900 units)	22,500
Less: Variable expenses ($17.5*9,00 units)	15,750
Contribution margin	6,750
Less: Fixed expenses	4,200
Net operating income	2,550

The net Operating Income at Sales Level 900 units would be $2,550.