Question

Creighton Corporation is a one product company and has provided the following information related to their product.

	Sales price per unit	$60
	Units produced and sold	2,000
Manufacturing cost:
	Variable manufacturing cost per unit	$20
	Fixed manufacturing cost per unit	12
Selling and Administrative cost:
	Variable S&A cost per unit	10
	Fixed S&A cost per unit	6

REQUIRED

1. Prepare a Contribution format income statement for Creighton Corporation.
2. Calculate the break-even point in dollar sales.
3. How many units does Creighton have to sell to achieve a target profit of $50,000.

1. Calculate the margin of safety percentage.
2. Use the degree of operating leverage to calculate the estimated percent increase in net operating income given a 15% increase in sales.

Answer 1

a.
Contribution income statement
	Total	Per unit
Sales	120000	60
Variable cost	60000	30
Contribution margin	60000	30
Fixed cost	36000
Net operating income	24000

b.
Break-even point in dollars = Fixed costs * Selling price / Contribution margin per unit = 36000 * 60 / 30	72000
c.
Units required to be sold = ( Fixed costs + Target profit ) / Contribution margin per unit = ( 36000 + 50000 ) / 30	2867	units
a.
Sales = 2000 * 60	120000
Margin of safety = ( Sales - Break even point ) / Sales = ( 120000 - 72000 ) / 120000	40%
b.
Degree of operating leverage = Contribution margin / Profit = 60000 / 24000	2.5
% increase in net operating income = Degree of operating leverage * % Increase in sales = 2.5 * 15%	37.50%