Question

Variable cost per rosette	$	2.50
Sales price per rosette		6.00
Total fixed costs per month		7000.00

Required:

1. Suppose Dana’s would like to generate a profit of $1,140. Determine how many rosettes it must sell to achieve this target profit.

2. If Dana’s sells 2,160 rosettes, compute its margin of safety in units, in sales dollars, and as a percentage of sales.

3. Calculate Dana’s degree of operating leverage if it sells 2,160 rosettes.

4a. Using the degree of operating leverage, calculate the change in Dana’s profit if unit sales drop to 1,836 units.

4b. Prepare a new contribution margin income statement to verify change in dana's profit.

Answer 1

1.)	Contribution margin per rosette	3.50	=6-2.5
	Number of rosette must sell to achieve target profit	2,326	=(7000+1140)/3.5
2.)	Breakeven sale in rosette	2,000	=7000/3.5
	Margin of sefty in units	160	=2160-2000
	Margin of sefty in sales dollar	$ 960	=160*6
	As percenatge of sales	7.41%	=160/2160
3.)	Sale Revenue	12,960	=6*2160
	Less: Variable cost	5,400	=2160*2.5
	Contribution Margin	7,560
	Less: Fixed Costs	7,000
	Net Income	560
	Degree of operating leverage	13.50	times
	( Contribution margin / Net income )
4-a.)	% change in sales	15%	=(2160-1836)/2160
	Using DOL, Profit will also decrease by	202.50%	=15%*13.5
	Change in Dana's Profit ( Profit decrease by )	1,134.00	=560*202.5%
4-b.)	Sale Revenue	11,016	=6*1836
	Less: Variable cost	4,590	=1836*2.5
	Contribution Margin	6,426
	Less: Fixed Costs	7,000
	Net Income	-574
	Change in Dana's profit	- $ 1,134	=-574-560