Question

Problem 4-34 Multiple Products, Break-Even Analysis, Operating Leverage Carlyle Lighting Products produces two different types of lamps: a floor lamp and a desk lamp. Floor lamps sell for $30, and desk lamps sell for $20. The projected income statement for the coming year follows: Check figures: 2. $277,778 4. Break-even revenue = $294,118 OBJECTIVE 0 0 Sales Less: Variable costs Contribution margin Less: Fixed costs Operatingincome $600 ,000 400,000 200,000 150,000 $ 50,000 The owner of Carlyle estimates that 60 percent of the sales revenues will be produced by floor lamps and the remaining 40 percent by desk lamps. Floor lamps are also responsible for 60 per- cent of the variable expenses. Of the fixed expenses, one-third are common to both products, and one-half are directly traceable to the floor lamp product line. Required: I. Compute the sales revenue that must be earned for Carlyle to break even. 2. Compute the number of floor lamps and desk lamps that must be sold for Carlyle to break even . 3. Compute the degree of operating leverage for Carlyle Lighting Products. Now assume that the actual revenues will be 40 percent higher than the projected revenues. By what percentage will profits increase with this change in sales volume? 4. CONCEPTUAL CONNECTION What is the theory behind the operating leverage concept?

Answer 1

I. CM ratio = [$200,000 / $600,000] = 0.33

Sales revenue: [$150,000 /0.33] = $450,000

　

2. Sale revenue produced by floor lamp: [$600,000 * 60%] = $360,000

Sale revenue produced by desk lamp: [$600,000 * 40%] = $240,000

Total units of floor lamp in $600,000 sales: [360,000 / 30] = 12,000 units

Total units of desk lamp in $600,000 sales: [240,000 / 20] = 12,000 units

Thus sales mix equls 1:1

Cost per unit of Floor lamp variable: 60 * $400,000 / 12,000 = $20

Cost per unit of Desk lamp variable: 40 * $400,000 / 12,000 = $13.33

CM = [CM of floor lamp + CM of desk lamp]

CM = [($30-$20) + ($20-$13.33)] = $16.67

Unit sales at break even : $150,000 / $16.67 = 8998 units

Because sales mix equals 1:1 thus;

No. of floor lamps : 8998 units

No. of desk lamps: 8998 units

　

3. No. of operating leverage: 200,000 / 50,000 = 4

% of change in profit = 4* 40% = 160%

　

4. The idea behind the concept of operating leverage is a formula of cost-accounting which measures the degree to which a project or firm can increase operating income with an increase in revenue