Question

2. Change all of the numbers in the data area of your worksheet so that it looks like this:

A B C 1 2 3 4 5 6 7 Chapter 5: Applying Excel Data Unit sales 30,000 units Selling price per unit $30 per unit Variable expenses per unit $18 per unit Fixed expenses $288,000

If your formulas are correct, you should get the correct answers to the following questions.

(a) What is the break-even in dollar sales?

(b) What is the margin of safety percentage?

(c) What is the degree of operating leverage? (Round your answer to 2 decimal places.)

3. Using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 20%.

4. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this:

A B C 1 2 3 4 5 6 7 Chapter 5: Applying Excel Data Unit sales 36,000 units Selling price per unit $30 per unit Variable expenses per unit $18 per unit Fixed expenses $288,000

(a) What is net operating income? (Negative amount should be indicated by a minus sign.)

(b) By what percentage did the net operating income increase?

5. Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $13,000 and at that price, Thad estimates 800 units would be sold each year. The variable cost to produce and sell the cycles would be $9,100 per unit. The annual fixed cost would be $2,808,000.

a. What is the break-even in unit sales?

b. What is the margin of safety in dollars?

c. What is the degree of operating leverage? (Round your answer to 2 decimal places.)

Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $11,500 to compete effectively. In that event, Thad would also reduce fixed expenses to $2,472,000 by reducing advertising expenses, but he still hopes to sell 800 units per year.

d. What would the net operating income be in this situation? (Negative amount should be indicated by a minus sign.)

Answer 1

2
(a)
Calculation of Break even in dollar sale
Sales	30000*30		900000
Less :-
Variable Cost	30000*18		540000
Contribution			360000
	Break Even	=	Fixed cost/ Contribution per unit
			288000/360000
			.80
(b)
Calculation of Margin of safety Percentage
	Margin of safety	=	Total sales - Break even Sales
			Total sales
			900000-720000/900000
			20

c)
Calculation of operating leverage
Sales	30000*30		900000
Less :-
Variable Cost	30000*18		540000
Contribution			360000
Less :-
Fixed Cost			288000
Earning before Interest and Tax			72000
Degree of Operating leverage	Contribution		360000
	Earning before Interest and Tax		72000
			5

3
If unit sales increase by 20%
No of units sold after 20% Increase			36000
Sales	36000*30		1080000
Less :-
Variable Cost	36000*18		648000
Contribution			432000
Degree of Operating leverage			Contribution/Earning before Interest and Tax
	5		432000/EBIT
	EBIT		432000/5
	EBIT		86400
	Percentage Change in Net profit		86400-72000
			72000
			14400
			72000
			20%

4
a)
Sales	36000*30		1080000
Less :-
Variable Cost	36000*18		648000
Contribution			432000
Less :-
Fixed Cost			288000
Earning before Interest and Tax(Net Operating Income)			144000

b)
Percentage Change in Net profit			144000-86400
			86400
			57600
			86400
			66.67%

5
a)
Break Even Point in unit sales	Break Even	=	Fixed cost/ Contribution per unit
Contribution per unit			13000-9100
			3900
			2808000/3900
			721 Units

b)
Margin of Safety in Dollars	Total Sales - Break Even Point Sales
Break Even Point Sales	721*13000		9373000
Total Sales	800*13000		10400000
			10400000-9373000
			1027000

c)
Sales	800*13000		10400000
Less :-
Variable Cost	800*9100		7280000
Contribution			3120000
Less :-
Fixed Cost			2808000
Earning before Interest and Tax			312000
Degree of Operating leverage	Contribution		3120000
	Earning before Interest and Tax		312000
			10

d)
Sales	800*11500		9200000
Less :-
Variable Cost	800*9100		7280000
Contribution			1920000
Less :-
Fixed Cost			2472000
Earning before Interest and Tax( Net Operating Income )			-552000