Question

Use the following Income Statement for Questions # 3 and # 4:

	Total	Per Unit	Percent
Sales (800 snowboards)	$200,000	$250	100%
Less variable expenses	120,000	150	60
Contribution margin	80,000	$100	40%
Less fixed expenses	80,000
Net operating income (loss)	$         0

Burton Snowboard Co.

Contribution Income Statement

3. Burton is considering an option (Plan A) to increase sales. What is the profit impact if Burton can increase unit sales from 800 to 1100 snowboards by using higher quality raw materials, thus increasing variable costs by $20 per snowboard? Show your answer by preparing an updated Income Statement below.

4. Refer back to the original income statement above (in black not blue). Burton is considering another option (Plan B) to increase sales.

a) What is the profit impact if Burton can increase unit sales from 800 to 1100 by increasing its advertising budget by $22,000 (fixed expense). (The variable cost remains at $150 / unit).

Show your answer by preparing an updated Income Statement below.

b) A company’s profits are more sensitive to changes in sales when it’s Operating Leverage is higher. Operating Leverage = Contribution Margin

Net Income

   Under which option is Burton’s Operating Leverage Higher? Plan A or Plan B ?

Show your work.

c) If Burton is concerned that its sales may not reach the projected level of 1100 snowboards – which Plan should it implement ? Select one AND ALSO EXPLAIN WHY:

Plan A or Plan B

  

Why?

d) If Burton is confident that its can exceed the projected level of 1100 snowboards – which Plan should it implement? Select one AND ALSO EXPLAIN WHY:

Plan A or Plan B

  

Why?

Answer 1

3.

Particulars	Total	Per unit	Percent
Sale (1,100 X 250)	$       275,000	$       250	100%
Variable Expenses (1,100 X 170)	$       187,000	$       170	68%
Contribution margin	$         88,000	$         80	32%
Fixed Expenses	$         80,000
Net Operating Income (Loss)	$           8,000

4.

Particulars	Total	Per unit	Percent
Sale (1,100 X 250)	$       275,000	$       250	100%
Variable Expenses (1,100 X 150)	$       165,000	$       150	60%
Contribution margin	$       110,000	$       100	40%
Fixed Expenses (80,000 + 22,000)	$       102,000
Net Operating Income (Loss)	$           8,000

b)

Operating Leverage = Contribution Margin / Net Income

Plan A = 88,000 / 8,000 = 11 times
Plan B = 110,000 / 8,000 = 13.75 times

Under Plan B, operating leverage is HIGHER

c)

PLAN A

This plan has lower operating leverage and a lower breakeven point as well. So in case the number of units are below 1,100 Plan A is much better.

d)

PLAN B

Plan B is better in this case because it has a higher operating leverage.