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:

The company's break-even in unit sales
The company's contribution margin ratio
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

ekkarill92 answered 1 year ago

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