Question

Fast Spirit Calendars imprints calendars with college names. The company has fixed expenses of $1,095,000 each month plus variable expenses of $ 6.50 per carton of calendars. Of the variable expense, 72% is cost of goods sold, while the remaining 28% relates to variable operating expenses. The company sells each carton of calendars for $ 16.50. Requirements: 1.Compute the number of cartons of calendars that Fast Spirit Calendars must sell each month to breakeven. 2.Compute the dollar amount of monthly sales that the company needs to earn $308,000 in operating income (round the contribution margin ratio to two decimal places). 3.Prepare the company’s contribution margin income statement for June for sales of 480,000 cartons of calendars. 4. What is June’s margin of safety (in dollars)? What is the operating leverage factor at this level of sales, and by what percentage will operating income change if July’s sales volume is 12% higher? Prove your answer with detailed explanations.

Answer 1

Facts:

Fixed cost = $1095000

Variable expenses = $6.50 per carton

Of the variable expenses 72% is Cost of goods sold and 28% is operating expenses

Selling Price of each carton = $16.50

1. Number of Cartons of calendars that Fast Spirit Calendars must sell each month to Breakeven:

Let the number of cartons to be sold be "x"

Income Statement

Particulars	Computation	Amount
Sales	$16.50 * x	$16.50x
Less: Variable cost	$6.50 * x	$6.50x
Contribution	$16.50x - $6.50x	$10x
Less: Fixed cost	Given	$1095000
Operating Income		$10x - $1095000

Breakeven point is the point of sales at which revenue compensates the cost exactly i.e., the Operating profit at that point is Zero.

$10x - $1095000 = 0

$10x = 1095000

x = 1095000/10

x = 109500 cartons  

Therefore Breakeven units of sales is 109500 cartons of calendars.

2. $ amount of monthly sales that the company needs to earn $308000 in operating Income.

Contribution margin = Selling Price - Variable cost

= $16.50 - $6.50

= $10.00

Contribution Margin ratio = (Contribution / Sales ) * 100

= ($10.00 / $16.50) *100

= 0.61

Required sales in $ = (Fixed cost + Target operating profit) / Contribution margin ratio

= ($1095000 + $308000) / 0.61

= $1403000 / 0.61

= $2300000

3. C0.'s contribution margin Income statement for June.

Fast Spirits Calendars

Contribution margin Income statement for June

Particulars	Computation	Amount
Sales	$480000 * $16.50	$7920000
Less: Variable cost
Cost of goods sold	$480000 * 6.50 * 72%	$(2246400)
Operating expenses	$480000 * 6.50 * 28%	$(873600)
Contribution margin	Sales - variable cost	$4800000
Less: Fixed cost	Given	$(1095000)
Operating Income	$4800000- $1095000	$3705000

4. June's margin of safety in $

Margin of safety = Actual sales - Breakeven sales

= $3705000 - ($109500 * $16.50)   

= $3705000 - $1806750.

= $1898250

Operating leverage factor:

Operating leverage factor = Contribution margin / Operating income

= $4800000 / $3705000

= 1.30 (rounded off)

If sales volume increases by 12% operating leverage factor increases by 1.30 * 12% = 1.30 + (1.30 * 12%)

= 1.30 + 0.16

= 1.46