Question

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 =

Answer 1

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	ekkarill92 Next > < Previous Related Solutions Frontleg Chocolate Company manufactures and sells premium chocolate called PremiumChoco. The following data are available for... Frontleg Chocolate Company manufactures and sells 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... 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. 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