Question

2. Liest Corporation produces and sells a single product whose selling price is $112.00 per unit and whose variable expense is $58.00 per unit. The company's monthly fixed expense is $249,480.
    

     Required:

1.    Compute break even sales in units and in dollars for Liest (4 points).

Break even in UNITS = _________________

Break even in Sales $ = _________________

   b.    Compute how many units and dollars Liest will have to sell in order to make a target net income of $35,640 (2 points).

Target Profit in Units = _______________

Target Profit in Sales $ = _____________

c.   Prove your answer in part b above by preparing a contribution margin income statement at that level of activity you calculated in part b. (4 points)

d.   At sales of 6,000 units, what is Liest’s margin of safety in units and dollars? What is Liest’s degree of operating leverage? (5 points)

Margin of Safety in UNITS = ________________

_______________

Margin of Safety in Sales $ = __________________

Degree of Operating Leverage = ________________

Answer 1

Solution:

a. Break-even sales in UNITS = Fixed expense / Contribution margin per unit

= $249,480 / ($112 - $58)

= $249,480 / $54

= 4,620 units

Break-even sales in Dollars = Fixed expense/ Contribution margin ratio

   = $249,480 / [($112-$58)/$112]

   = $517,440

b. Target sales in UNITS = (Target income + Fixed expense) / Contribution margin per unit   

   = ($35,640 + 249,480) / $54

   = 5,280 units

Target sales in Dollars = Target sales in units * Selling price per unit

   = 5,280 * $112 = $591,360

C. Contribution margin income statement :

Cont. margin inc. statement (at 5,280 units of sales)
Sales (5,280 * $112)	$591,360
Variable cost (5,280*$58)	(306,240)
Contribution margin	$285,120
Fixed expense	(249,480)
Net Income	$ 35,640

d. Margin of safety in Units = Sales level in units - Break-even sales in units

= 6,000 - 4,620 = 1,380 units

Margin of safety in Dollars = 1,380 * $112 = $154,560

Degree of operating leverage = Contribution margin / Net income

= 6,000*$54 / (6,000*$54 - $ 249,480)

   = $324,000 /$74,520

= 4.35 (rounded off)