Question

Voltar Company manufactures and sells a specialized cordless telephone for high electromagnetic radiation environments. The company's contribution format income statement for the most recent year is given below:

Sales (20,000 Units @ 60 per unit)   $1,200,000

Variable Expenses ($45 per unit)          900,000

Contribution Margin                             300,000

Fixed Expenses                                       240,000

   NOI                                                        60,000

Required:

1.      Compute the company's CM ratio and variable expense ratio.

2.      Compute the company's break-even point in both unit sales and dollar sales.

3.      Assume that next year management wants the company to earn a profit of at least $90,000. How many units will have to be sold to meet this target profit?

4.      Refer to the original data. Compute the company's margin of safety in both dollar and percentage form.

5.      Compute the company's degree of operating leverage at the present level of sales.

6.      Assume that through a more intense effort by the sales staff, the company's sales increase by 8% next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.

7.      In an effort to increase sales and profits, management is considering the use of a higher-quality speaker. The higher-quality speaker would increase variable costs by $3 per unit, but management could eliminate one quality inspector who is paid a salary of $30,000 per year. The sales manager estimates that the higher-quality speaker would increase annual sales by at least 20%.

a. Assuming that changes are made as described above, compute the company's new break-even point in both unit sales.

Answer 1

Solution:
1	CM ratio = (Sales - variable expenses/Sales )*100
	= ($300,000/$1,200,000)*100
	= 25%
	Variable expense ratio =( Variable expense/ sales )*100
	= ($900,000/1,200,000)*100
	=   75%
2	Break-even point in units = Fixed Cost / Contrybution per unit
	= $240,000/ $60 - $45
	= 16,000 units
	Break-even point in dollars = $16,000 * $60 = $960,000
3	Target Profit = $90,000
	Required contrybution = Target profit + fixed cost
	= $90,000 + $240,000
	= $330,000
	Contrybution margin per unit = $15
	Required units to be sold to meet the target profit = $330,000/$15 = 22,000 units
4	Margin for safety in dollar = Sales - Break-even sales
	= $1,200,000 - $960,000
	= $240,000
	Margin of safety ratio = Margin of safety sales / Sales *100
	= $240,000/$1,200,000 * 100
	= 20%
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