In: Accounting
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:
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