Question

In: Accounting

A manufacturer of tiling grout has supplied the following data: Kilograms produced and sold................... 300,000 Sales...

A manufacturer of tiling grout has supplied the following data:

Kilograms produced and sold................... 300,000

Sales revenue............................................. 1,960,000

Variable manufacturing expense.......................960,000

Fixed manufacturing expense..........................266,000

Variable selling and admin expense................360,000

Fixed selling and admin expense.....................232,000

Net operating income.......................................132,000

Required: Calculate the:

  1. The company's break-even in unit sales
  2. The company's contribution margin ratio
  3. The company's degree of operating leverage

Solutions

Expert Solution

a. Computation of Company's break-even sales in units:

Total Per Unit
Kilograms Produced and Sold 300,000
Sales Revenue $1,960,000 $6.53
Variable Costs:
      Variable Manufacturing Expense $960,000 $3.20
      Variable Selling and admin Expense $360,000 $1.20
Total Variable Cost $1,320,000 $4.40
Contribution Margin (Sales - Variable Cost) $640,000 $2.13
Fixed Costs:
      Fixed Manufacturing Expense $266,000
      Fixed Selling and admin Expense $232,000
Total Fixed Cost $498,000

Break-even sales (in units) = Fixed Costs / Contribution per unit = $498,000 / $2.13 = 233,438 units

b. Calculation of Company's Contribution Margin Ratio:

Contribution Margin Ratio = (Contribution margin / Sales) *100 = ($640,000 / $1,960,000) *100 = 32.65%

c. Calculation of Comany's degree of operating leverage:

Degree of Operating Leverage (DOL) = Contribution Margin / Net Operating Income = $640,000 / $132,000 = 4.85 times

Alternate Answer:

The given question might contain an error because the net operating income calculation is shown as wrong i.e. $132,000. Assuming that the net operating income be $142,000.

The revised calculations will be as follows:

Total Per Unit
Kilograms Produced and Sold 300,000
Sales Revenue $1,960,000 $6.53
Variable Costs:
      Variable Manufacturing Expense $960,000 $3.20
      Variable Selling and admin Expense $360,000 $1.20
Total Variable Cost $1,320,000 $4.40
Contribution Margin $640,000 $2.13
Fixed Costs:
      Fixed Manufacturing Expense $266,000
      Fixed Selling and admin Expense $232,000
Total Fixed Cost $498,000
Net Operating Income $142,000

a. Break-even sales (in units) = Fixed Cost / Contribution per unit = $498,000 / $2.13 = 233,438 units

b. Contribution Margin Ratio = (Contribution margin / Sales) *100 = ($640,000 / $1,960,000) *100 = 32.65%

c. Degree of Operating Leverage (DOL) = Contribution Margin / Net Operating Income = $640,000 / $142,000 = 4.51 times


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