Question

2. Bunnell Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $20,000 Variable expenses 12,000 Contribution margin 8,000 Fixed expenses  6,000 Net operating income $ 2,000 Required: (Answer each question independently and always refer to the original data unless instructed otherwise.) (Show all work/calculations. No credit will be given without showing your work and/or calculations.)

a. What is the contribution margin per unit?

b. What is the contribution margin ratio?

c. What is the variable expense ratio?

d. If sales increase to 1,001 units, what would be the increase in net operating income?

e. If sales decline to 900 units, what would be the net operating income?

f. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income?

g. If the variable cost per unit increases by $1, spending on advertising increases by $1,500, and unit sales increase by 250 units, what would be the net operating income?

h. What is the break-even point in unit sales?

i. What is the break-even point in dollar sales?

j. How many units must be sold to achieve a target profit of $5,000?

k. What is the margin of safety in dollars? What is the margin of safety percentage?

l. What is the degree of operating leverage? m. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

n. Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $6,000 and the total fixed expenses are $12,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

o. Using the degree of operating leverage that you computed in the previous question, what is the estimated percent increase in net operating income of a 5% increase in sales?

Answer 1

	Particulars	Qty	Sales	Per Unit
	Sales (a)	1000	$     20,000.00	$         20.00
	Less:
	Variable expenses (b)	1000	$     12,000.00	$         12.00
	Contribution (c)		$       8,000.00
	No. of units		1000
1	Contribution per unit		$               8.00
2	Contribution margin ratio (a/c)		40%
3	Variable expenses ratio (a/b)		60%
4	If sales is increased to 1001
	Particulars	Qty	Per unit price	Sales
	Sales	1001	20	$ 20,020.00
	Less:
	Variable expenses	1001	12	$ 12,012.00
	Contribution			$   8,008.00
	Less: Fixed expenses			$   6,000.00
	Net operating income			$   2,008.00
	Current operating income			$   2,000.00
	Net increase in operating Income			$            8.00