Question

A. Lobster Trap Company is considering automating its manufacturing facility. Company information before and after the proposed automation follows:

	Before Automation			After Automation
Sales revenue	$	198,000		$	198,000
Less: Variable cost		93,000			57,000
Contribution margin	$	105,000		$	141,000
Less: Fixed cost		20,000			57,000
Net operating income	$	85,000		$	84,000

Required: Compute Lobster Trap’s degree of operating leverage before and after automation. (Round your answers to 4 decimal places.)

1. Calculate Lobster Trap’s break-even sales dollars before and after automation.

2. Compute Lobster Trap’s degree of operating leverage before and after automation.

B. Last month, Laredo Company sold 520 units for $60 each. During the month, fixed costs were $8,211 and variable costs were $9 per unit.

(Round your Contribution Margin Ratio to the nearest whole percentage.)

Required:

1. Determine the unit contribution margin and contribution margin ratio.

2. Calculate the break-even point in units and sales dollars.

3. Compute Laredo’s margin of safety in units and as a percentage of sales.

Answer 1

A. Lobster Trap Company
1. Calculation of Lobster Trap’s break-even sales dollars before and after automation.
Particulars	Before Automation	After Automation
Sales Revenue	198,000	198,000
Contribution	105,000	141,000
Contribution Margin Ratio	53.03%	71.21%
=Contribution/Sales*100	=105000/198000*100	=141000/198000*100
Fixed Cost	20,000	57,000
Break Even Sales	37,714	80,043
=Fixed cost/Contribution Margin Ratio	=20000/53.03%	=57000/71.21%
2. Computation of Lobster Trap’s degree of operating leverage before and after automation.
Particulars	Before Automation	After Automation
Contribution	105,000	141,000
Net operating income	85,000	84,000
Degree of Operating leverage	1.2353	1.6786
=Contribution/Net operating income	=105000/85000	=141000/84000
B. Laredo Company
Particulars	Per Unit	Total
Units	1	520
Revenue	60	31,200
Less: Variable cost	9	4,680
Contribution Margin	51	26,520
Contribution Margin Ratio	85.00%	85.00%	26520/31200*100
Fixed Cost		8,211
Break Even Point (Sales)	Fixed cost/CM ratio	9,660	=8211/85%
Break Even Point (Units)	Break Even (Sales)/60	161	=9660/60
Margin of Safety in Units (MS)	Total Units-Break Even	359	=520-161
Margin of Safety as a % of sales	MS/Sales Units	69.04%	359/520%