Question

4. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this:

Chapter 5: Applying Excel Data Unit sales 84,000 units Selling price per unit $10 per unit Variable expenses per unit $4 per unit Fixed expenses $210,000

(a) What is net operating income? (Negative amount should be indicated by a minus sign.)

(b) By what percentage did the net operating income increase?

Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $16,000 and at that price, Thad estimates 300 units would be sold each year. The variable cost to produce and sell the cycles would be $11,200 per unit. The annual fixed cost would be $1,152,000.

a. What is the break-even in unit sales?

b. What is the margin of safety in dollars?

c. What is the degree of operating leverage? (Round your answer to 2 decimal places.)

Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $13,000 to compete effectively. In that event, Thad would also reduce fixed expenses to $911,000 by reducing advertising expenses, but he still hopes to sell 300 units per year.

d. What would the net operating income be in this situation? (Negative amount should be indicated by a minus sign.)

Answer 1

Part 1 of the question
	Sales Units = 84000
	Sales units after 20% increase = 84000*1.2		100800
	Particulars		per unit	for 100800 units	for 84000 units
	Sales		10	1008000	840000
	Variable Expenses	4	403200	336000
	Contribution		6	604800	504000
	Fixed Expenses			210000	210000
(a)	Operating Income		394800	294000
	% of Operating Income		39.17	35
(b)	Increase in Operating Income = 39.17-35 =		4.17
Part 2 of the question	(Thad Morgan)
	Particulars		per unit	for 300 units	for 260 units
	Sales		16000	4800000	4160000
	Variable Expenses	11200	3360000	2912000
	Contribution		4800	1440000	1248000
	Fixed Expenses			1152000	1152000
	Operating Income		288000	96000
(a)	Breakeven Units = Fixed Cost/(Selling Price - Variable Cost) =	=1152000/(4800)	240
(b)	Margin of Safety = (Actual Sales - Breakeven Sales) * Selling Price	=(300-240)* 16000	960000
(c)	Degree of Operating Leverage = % change in Operating Income / % change in Sales	= 13.33/67.67	0.197
	% change in Operating Income	=(288000-96000)/288000	66.67%
	% change in Sales			=(4800000-4160000)/4800000	13.33%
(d)	Particulars		per unit	for 300 units
	Sales		13000	3900000
	Variable Expenses	11200	3360000
	Contribution		1800	540000
	Fixed Expenses			911000
	Net Operating Income		-371000