Question

1) Fauci 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

Required:

a. What is the contribution margin per unit?

b. What is the contribution margin ratio?

c. What is the variable expense ratio?

d. If sales increase to 3,050 units, what would be the estimated increase in net operating income?

e. If sales decline to 2,900 units, what would be the estimated net operating income?

f. If the selling price increases by $4 per unit and the sales volume decreases by 200 units, what would be the estimated net operating income?

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?

2) same set of data in # 1 above on Fauci – answer these questions :

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

a) Contribution per unit = contribution ÷ sales unit = 60000÷3000 units = 2 per unit

b) Contribution margin ratio = contribution ÷ total sales × 100 = 60000 ÷ 150000 × 100 = 40%

c) Variable expenses ratio = variable expenses ÷ total sales × 100 = 90000 ÷ 150000 × 100 = 60%

d) If sales unit increases to 3050 units, then increase in operating income will be by $1000.

e) If sales unit decreases to 2900 units, net iperating income would be $10000.

f) If sales unit decreases by 200 units and price per unit increases by $4 then estimated net operating income would be $19200

g) If sales unit increases by 450 units and variable cost increases by $5 per unit and advertising expenses also increased by $3000 then net operating income would be $750

h) Break even point = fixed costs ÷ ( sales price per unit - variable cost per unit) = 48000 ÷ 20 = 2400 units

i) Break even sales = fixed cost ÷ contribution margin = 48000 ÷ 40% = $120000

j) Sales units to achieve target profit = (fixed cost + target profit) ÷ (sales price per unit - variable cost per unit) = 48000 + 54000 ÷ 4 = 5100 units

k) Margin of safety in dollrars = contribution ÷ fixed costs = $12000

l) Margin of safety (%) = profit ÷ sales × 100 = 12000 ÷ 150000 × 100 = 8%

m) Operating Leverage = contribution ÷ operating income (EBIT) = 60000 ÷ 12000 = 5

n) Operating Leverage = percentage change in EBIT ÷ Percentage change in sales

5 = percentage change in EBIT ÷ 15%

Percentage change in EBIT = 75%