Question

college TeamCollege Team
Calendars imprints calendars with college names. The company has fixed expenses of

$1,065,000

each month plus variable expenses of

$3.50

per carton of calendars. Of the variable​ expense,

66​%

is cost of goods​ sold, while the remaining 34​%

relates to variable operating expenses. The company sells each carton of calendars for

$ 13.50$13.50.

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.Requirement 1. Compute the number of cartons of calendars that

College TeamCollege Team

Calendars must sell each month to breakeven.  

Begin by determining the basic income statement equation.

Sales revenue

-

Variable expenses

-

Fixed expenses

=

Operating income

Using the basic income statement equation you determined above solve for the number of cartons to break even.

The breakeven sales is

cartons.

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Requirements

1.	Compute the number of cartons of calendars that College TeamCollege Team Calendars must sell each month to break even.
2.	Compute the dollar amount of monthly sales that the company needs in order to earn $304,000 in operating income​ (round the contribution margin ratio to two decimal​ places).
3.	Prepare the​ company's contribution margin income statement for June for sales of 470,000 cartons of calendars.
4.	What is​ June's margin of safety​ (in dollars)? What is the operating leverage factor at this level of​ sales?
5.	By what percentage will operating income change if​ July's sales volume is 16​% ​higher? Prove your answer.

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Answer 1

Selling price per Carton	$ 13.50	per Carton
Variable expenses per Carton	$ 3.50	per Carton
Fixed expenses	$ 10,65,000
Requirement 1
Break even sales (In cartons)
Selling price per Carton	$ 13.50	per Carton
Variable expenses per Carton	$ 3.50	per Carton
Contribution Margin per Carton	$ 10.00	per Carton
Break even in unit sales =	Fixed expenses/ contribution per unit
	= 1,065,000/$10
	=106,500 cartons
Basic Income Equation for Break even Sales
Sales Revenue	- Variable expenses	- Fixed Expenses	= Operating Income
1,437,750	372,750	1,065,000	-
Requirement 2
Dollar amount of monthly sales that the company needs in order to earn $304,000 in operating income
CM ratio   = Contribution margin/Sales X 100
= $10/13.50 X 100
= 74.07 %
Particulars	Calculation	Amount ($)
Desired Profit		304,000
Add: Fixed Expenses		1,065,000
Desired Contribution		1,369,000
Desired Sales	(1,369,000/74.07%)	1.848,252	(Desired Sales/ CM ratio)
Requirement 3
The​ company's contribution margin income statement for June for sales of 470,000 cartons of calendars
Particulars	Calculation	Amount ($)
Sales	470,000 X13.5	6,345,000
Variable expenses	470,000 X3.5	1,645,000
Contribution Margin income		$ 4,700,000
Requirement 4a
3.June the margin of safety
margin of safety in dollar    =	Actual sales - Break even sales
	= 6,345,000-1,437,750
margin of safety in dollars	= 4,907,250
Requirement 4b
4. Compute the operating leverage factor at this level of sales
Sales	6,345,000
Varaible expenses	1,645,000
Contribution margin	4,700,000
Fixed Expenses	1,065,000
Operating income	3,635,000
Operating leverage factor	= contribution margin/operating income
	=4,700,000/3,635,000
	= 1.29
Requirement 5
Percentage will operating income change, if​ July's sales volume is 16% higher
July's Sales Volume	=470,000 X116%	=545,200 Cartons
Sales	545,200 X13.5	7,360,200
Varaible expenses	545,200 X3.5	1,908,200
Contribution margin		5,452,000
Fixed Expenses		1,065,000
Operating income		4,387,000
Increase In Operating income	=4,387,000-3,635,000
	=752,000
Percentage of change in operating income	= 752,000/3,635,000 X100
	=20.69%