Question
In: Accounting
Frontleg Chocolate Company manufactures and sells a premium chocolate called PremiumChoco. The following data are available...
| Frontleg Chocolate Company manufactures and sells a premium chocolate called PremiumChoco. The following | ||||||
| data are available for preparing budgets for PremiumChoco for June through August of 2020. | ||||||
| 1. Sales: June , 30,000 pounds; July, 56,000 pounds, August 58,000 pounds. | ||||||
| 2. Direct materials: each pound of PremiumChoco requires 5 pounds of cacao seeds at a cost of $2.95 per | ||||||
| pound and 4 pounds of cane sugar at $.50 per pound. | ||||||
| 3. Desired inventory levels: | ||||||
| Type of Inventory | May 1 | June 1 | July 1 | August 1 | ||
| PremiumChoco (pounds) | 7,000 | 8,000 | 15,000 | 18,000 | ||
| cacao seeds (pounds) | 6,000 | 9,000 | 10,000 | 13,000 | ||
| cane sugar (pounds) | 5,000 | 14,000 | 20,000 | 25,000 | ||
| 4. Direct labor: direct labor time is 30 minutes per pound at an hourly rate of $20 per hour. | ||||||
| 5. Selling and administrative expenses are expected to be .05 cents per unit sold plus $82,000 per month. | ||||||
| 6. Your assistant has prepared two budgets: (1) The manufacturing overhead budget shows expected | ||||||
| costs to be 150% of direct labor cost (all variable costs). | ||||||
| 7. The company uses a 30% markup percentage on total cost | ||||||
| 8. Interest Expense is $150,000. | ||||||
| 9. Income taxes are expected to be 21% of income before income taxes. | ||||||
10a) Compute the operating leverage. The image is not cropped, I copied it exactly as it is.
| 10a | Operating leverage | |
| Sales revenue | ||
| Variable expenses | ||
| Contribution margin | ||
| Operating leverage = |
Solutions
Expert Solution
Please refer working note no. 1 & 2 for numbers used in calculation:
Operating Leverage = (Sales Revenue - Variable Cost) / Profits Before Tax
= ($6,272,760 - $4,579,200) / $1,297,560
= 1.305
Hence, operating levarage is 1.305
Sales Revenue = $6,272,760 (please refer working note no. 1 & 2)
Direct Variable Expenses = Direct Material + Direct Labour + Mfg. / Direct Variable Overheads
= $2,412,000 + $1,440,000 + $720,000
= $4,572,000
Hence, Direct Variable Expenses are $4,572,000
Total Variable Expenses = Direct Material + Direct Labour + Variable Overheads + Variable Admin, Selling & Marketing Expenses
= $2,412,000 + $1,440,000 + $720,000 + $7,200
= $4,579,200
Hence, Total Variable Expenses are $4,579,200
Contribution Margin = Sales Revenue - Variable Costs or say Total Variable Expenses
= $6,272,760 - $4,579,200
= $1,693,560
Hence, Contribution Marig is $1,693,560
Working Note 1:
| Particulars | Formula | June | July | August | Total | ||
| Direct Material Cost | CACAO Material Cost + Cane Sugar Material Cost | 502,500 | 938,000 | 971,500 | 2,412,000 | ||
| CACAO Seeds Per Pound | 5 | 5 | 5 | 5 | |||
| Total Qty. | Sales Qty. * CACAO Seeds Per Pound | 150,000 | 280,000 | 290,000 | 720,000 | ||
| Price Per Pound | 3 | 3 | 3 | 3 | |||
| CACAO Material Cost | Total Qty. * Price Per Pound | 442,500 | 826,000 | 855,500 | 2,124,000 | ||
| Cane Sugar Per Pound | 4 | 4 | 4 | 4 | |||
| Total Qty. | Sales Qty. * Cane Sugar Per Pound | 120,000 | 224,000 | 232,000 | 576,000 | ||
| Price Per Pound | 0.50 | 0.50 | 0.50 | 0.50 | |||
| Cane Sugar Material Cost | Total Qty. * Price Per Pound | 60,000 | 112,000 | 116,000 | 288,000 | ||
| Direct Labour Cost | Total Labour Cost | 300,000 | 560,000 | 580,000 | 1,440,000 | ||
| Per Pound Time Consumption | 0.50 | 0.50 | 0.50 | 0.50 | |||
| Total Hours | Sales Qty. * Per Pound Time Consumption | 15,000 | 28,000 | 29,000 | 72,000 | ||
| Price Per Hour | 20 | 20 | 20 | 20 | |||
| Total Labour Cost | Total Hours * Price Per Hour | 300,000 | 560,000 | 580,000 | 1,440,000 | ||
| Manufacturing Variable Cost | 50% of Direct Labour Cost | 150,000 | 280,000 | 290,000 | 720,000 | ||
| Total Direct Expenses | Direct Material + Direct Labour + Mfg. Variable Cost | 952,500 | 1,778,000 | 1,841,500 | 4,572,000 | ||
| Variable Sellling & Admin Expenses | 1,500 | 2,800 | 2,900 | 7,200 | |||
| Per Unit Cost | 0.05 | 0.05 | 0.05 | 0.05 | |||
| Total Variable Cost | Total Direct Expenses + Variable Selling & Admin | 954,000 | 1,780,800 | 1,844,400 | 4,579,200 | ||
| Fixed Selling & Admin Expenses | Monthly | 82,000 | 82,000 | 82,000 | 246,000 | ||
| Total Cost | Total Variable + Fixed Selling & Admin | 1,036,000 | 1,862,800 | 1,926,400 | 4,825,200 | ||
| Mark up | 30% | 310,800 | 558,840 | 577,920 | 1,447,560 | ||
| Sales Revenue | Total Cost + Markup | 1,346,800 | 2,421,640 | 2,504,320 | 6,272,760 | ||
Working Note: 2
| Particulars | Formula | Amount | ||
| Sales Revenue | Total Cost + Markup | 6,272,760 |
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