Question

	Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this: A B C D 1 Chapter 5: Applying Excel 2 3 Data 4 Unit sales 24,000 units 5 Selling price per unit $10 per unit 6 Variable expenses per unit $5 per unit 7 Fixed expenses $90,000 8

(a)	What is net operating income? (Negative amount should be indicated by a minus sign.)

     

(b)	By what percentage did the net operating income increase?

     

5.

Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $18,000 and at that price, Thad estimates 400 units would be sold each year. The variable cost to produce and sell the cycles would be $13,500 per unit. The annual fixed cost would be $900,000.

a.	What is the break-even in unit sales?

     

b.	What is the margin of safety in dollars?

     

c.	What is the degree of operating leverage? (Round your answer to 2 decimal places.)

     

Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $14,600 to compete effectively. In that event, Thad would also reduce fixed expenses to $720,000 by reducing advertising expenses, but he still hopes to sell 400 units per year.

d.	What would the net operating income be in this situation? (Negative amount should be indicated by a minus sign.)

     

Answer 1

	UOM		increase by 20%	increase by 20% from 24000 units
Number of units sold	units	20000	24000	28800
Sales price	price/unit	$10	$10	$10
Variable Expenses	price/unit	$5	$5	$5
Fixed Expenses	$	$90,000	$90,000	$90,000
Sales unit	20,000	$24,000		28800
Sales:	$200,000	$240,000		$288,000
Less: variable expenses	($100,000)	($120,000)		($144,000)
Less: Fixed expenses	($90,000)	($90,000)		($90,000)
Net operating Profit	$10,000	$30,000	200%	$54,000	80%

5 (a)	Breakeven sales in unit = Fixed costs / ( sales price per unit- variable cost per unit)
	Fixed Costs	$900,000
	Sales price per unit	$18,000
	Variable cost per unit	$13,500
	Breakeven sales	$ 900,000/(18000-13500)	200	units

b)	Margin of safety = Actual Sales- Breakeven Sales
	Actual sales	$7,200,000
	Breakeven sales	$3,600,000
	Margin of Safety	$3,600,000
c)	Degree of operating leverage = Contribution Margin/ Net Operating Income
	Contribution Margin	$1,800,000
	Net Operating income	$900,000
	Degree of operating leverage = 200%
	d) Sales $5,840,000 Less: Variable cost ($5,400,000) Less: Fixed costs ($720,000) Net Operating Profit -$280,000