Question

Sally’s Swing Company produces and sells a single high-priced swing and in fiscal year 20XX the company produced and sold 30,000 units. Sally’s Swing Company Income Statement For Fiscal Year 20XX Sales $1,800,000 Variable Costs $1,350,000 Contribution Margin 450,000 Fixed Costs $240,000 Income Before Taxes 210,000 Tax Expenses 63,000 Income After Taxes 147,000 *Total sales and production is 30,000 units

1. Calculate the per unit figures for each item from the Income Statement.

2. Compute the breakeven point in units for fiscal 20XX.

3. Determine the company’s margin of safety in units for fiscal 20XX.

4. Determine the company’s degree of operating leverage at the current level of operations. If the company’s sales in units were to increase 30%, how much would profits before taxes increase in percentage terms?

5. Compute the sales level required in units to achieve a level of profits before taxes of $270,000.

6. Based on the original data above, determine the sales level required if the company desires a profit after taxes of $210,000. It is believed that the tax rate will remain at current levels

7. Assume the company is expecting to experience a shortage of its raw materials. This situation is expected to result in an increase in the manufacturing costs of $3 per unit. Under this circumstance, and assuming that the company does not believe that it can increase its selling price, determine the company’s break even point and new safety margin.

8. Management has decided to raise the price of its product to $65 per unit. It also will spend an additional $102,000 per year for advertising. Although it has never paid commissions before, the company has decided to begin paying sales personnel $1 per unit for every unit sold. Determine the new breakeven point. Determine the margin of safety of the company under this plan if sales only reach 27,000 units. Note: Solve this question starting at the original data.

Answer 1

As per our policy, we cannot able to post solution more than four sub parts of question.

		Total	Per unit (total / 30000)
	Sales	1,800,000	60.00
Less	Variable Costs	1,350,000	45.00
	Contribution Margin	450,000	15.00
Less	Fixed Costs	240,000	8.00
	Income Before Taxes	210,000	7.00
Less	Tax Expenses	63,000	2.10
	Income After Taxes	147,000	4.90

Answer 2
Fixed Costs	240,000
Divided by : Contribution Margin per unit	15
Breakeven point in units	16,000
Answer 3
Units sold	30,000
Less: breakeven point in units	16,000
Margin of safety in units	14,000
Answer 4
Contribution Margin	450,000
Divided by: Income Before Taxes (operating profit because no interest expense given)	210,000
Degree of operating leverage	2.142857143
Degree of operating leverage = % change in profit before tax / % change in sales
Degree of operating leverage * % change in sales = % change in profit before tax
Degree of operating leverage	2.142857143
Multiplied by: increase in sales in %	30.00000%
Profits before taxes increase in percentage term	64.28571%
Proof of answer
Unit sold (30000+(30000*30%))	39000
Sales (39000*60)	2,340,000
Variable Costs (39000*45)	1,755,000
Contribution Margin	585,000
Fixed Costs	240,000
Income Before Taxes, if change in 30% in sales	345,000
Less: income in profit before tax, at given in question	210,000
Increase in income before tax	135,000
Increase in income before tax	135,000
Divided by: income in profit before tax, at given in question	210,000
Profits before taxes increase in percentage term	64.28571%