Question

Klein Company distributes a high-quality bird feeder that sells for $65 per unit. Variable costs are $26 per unit, and fixed costs total $180,000 annually

. Required: Answer the following independent questions:

1. What is the product’s CM ratio?

2. Use the CM ratio to determine the break-even point in sales dollars.

3. The company estimates that sales will increase by $56,000 during the coming year due to increased demand. By how much should operating income increase?

4. Assume that the operating results for last year were as follows:

Sales	$	685,000
Variable expenses		415,000
Contribution margin		270,000
Fixed expenses		180,000
Operating income	$	90,000
a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 16% next year. By how much should operating income increase? 5-a. Refer to the original data. Assume that the company sold 26,500 units last year. The sales manager is convinced that a 16% reduction in the selling price, combined with a $60,000 increase in advertising expenditures, would cause annual sales in units to increase by 10%. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. (Round "Per Unit" answers to 2 decimal places.) KLEIN COMPANY Contribution Margin Income Statement Last Year Proposed 26,500 units units Total Per Unit Total Per Unit 0 0.00 0 0.00 $0 $0

5-b. Would you recommend that the company do as the sales manager suggests? YES or NO

6. Refer to the original data. Assume again that the company sold 26,500 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $3 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 20%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

Answer 1

Klein company :
Selling price per unit			65
Variable cost per unit			26
Contribution per unit = selling price - variable cost					39
1) Contributuin margin ratio = contribution / sales *100						60	%
2) Break even point (in dollars) = fixed cost / contribution margin ratio							180000/60%		300000
3) If sales would increase by 56,000 :
increase in sales will increase the contribution
Increase in contribution = 56000*60%				33600
And fixed cost remains constant
Therefore, Net operating income would increase by $33,600
4)
	Sales	$	685,000
	Variable expenses		415,000
	Contribution margin		270,000
	Fixed expenses		180,000
	Operating income	$	90,000
a) Degree of operating leverage = Contribution / EBIT
Here EBIT means operating income
DOL = 270000/90000		3 times
Degree of operating leverage speaks about change in operating income due to change in sales
b) DOL = % change in EBIT / % change in sales
3=% change in EBIT / 16%
% change in EBIT = 48%
Verification :
16% increase in sales results in 16% increase in contribution
Revised contribution = 270000*116/100				313200
Less : Fixed expense				-180000
Revused operating income				133200
Change in operating income			43200	48	%
Please post remaining sub parts as another question as I've answered 4 subparts