Question
In: Accounting
Breakeven, Target Profit, Margin of Safety, Operating Leverage Pike Street Taffy makes and sells taffy in...
Breakeven, Target Profit, Margin of Safety, Operating Leverage
Pike Street Taffy makes and sells taffy in a variety of flavours in a shop located in the local public market. Data for a recent week are as follows:
|
Revenue (2,000 kgs @ $4.80 per kg) |
$9,600 |
|
|
Cost of ingredients |
$3,200 |
|
|
Rent |
800 |
|
|
Wages |
4,800 |
8,800 |
|
Pretax income |
800 |
|
|
Taxes (20%) |
160 |
|
|
After-tax income |
$ 640 |
All employees work standard shifts, no matter how much taffy is produced or sold.
REQUIRED
A.
Calculate the breakeven point in units and in revenue.
B.
Calculate the number of units and the amount of revenues that would be needed for after-tax income of $3,000.
C.
Calculate the margin of safety in units and the margin of safety percentage.
D.
Calculate the degree of operating leverage.
Solutions
Expert Solution
| P.UNIT | |||||
| REVENUE | 9600 | 4.8 | (9600/2000 | ||
| LESS | COST OF INGREDIENTS | 3200 | 1.6 | 3200/2000 | |
| CONTRIBUTION | 6400 | 3.2 | 6400/2000 | ||
| LESS | RENT | 800 | FIXED COST | ||
| LESS | WAGES | 4800 | |||
| PRE TAX INCOME/EBIT | 800 | ||||
| LESS | TAX | 160 | |||
| AFTER TAX INCOME | 640 |
|
BREAK EVEN POINT= FIXED COST/CONTRIBUTION PER UNIT) * SALES UNIT
|
| BREAK EVEN POINT= FIXED COST/CONTRIBUTION PER UNIT | |||||
| UNIT WISE | 1750 | (5600/3.2) | |||
| REVENUE WISE | 8400 | [(5600/3.2)*4.8] | |||
B do reverse calculation
| units | UNITS | P.UNIT | |||
| REVENUE | 14025 | 2921.875 | 4.8 | ||
| LESS | COST OF INGREDIENTS | 4675 | 2921.875 | 1.6 | |
| CONTRIBUTION | 9350 | 2921.875 | (9350/3.2) | 3.2 | |
| LESS | RENT | 800 | FIXED COST | ||
| LESS | WAGES | 4800 | |||
| PRE TAX INCOME 100% | 3750 | (3000/80%) | |||
| LESS | TAX @20% | 750 | |||
| AFTER TAX INCOME I.E 80% | 3000 | given |
c. margin of saftey percentage method =actual sales - breakeven
point sales) / actual sales
-unit method = actual sales - breakeven point sales) / sale price per unit
1- unit method = 9600-8400)/4.8 = 250
2. percentage = 1200/9600 = 0.125 or 12.5%
D. degree of operating leveage = contribution / EBIT
= 6400/800
=8
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