Question

Gro-right manufactures and sells greenhouses to large commercial farms. The 2020 Budget for the company shows the following information:

Selling Price per unit	$15,000
Variable manufacturing Costs per unit	$7,500
Variable Selling Costs per unit	$1,500
Annual Fixed Costs	$12,000,000
Desired Net Income	$1,020,000
Income Tax Rate	15%

Required:

1. Find the break-even level of sales in units for 2020 based on the budgeted information.
2. Find the level of sales in sales dollars needed to achieve the desired budgeted net income of the company.
3. Create a Contribution format income statement for the level of sales needed to achieve the desired level of net income.
4. At the level of sales to achieve the desired net income, what is the margin of safety in dollars?
5. What is the margin of safety percentage? What is the margin of safety percentage indicating?
6. At the level of sales to achieve the desired net income, what is the degree of operating leverage for the company?
7. Using the operating leverage, if sales were to increase by 10% by what percent would the operating income increase?

Answer 1

Solution a
	Variable manufacuting cost	7,500
	Variable selling cost	1,500
	Total variable cost	9,000
	Selling price	$        15,000.00
	Variable Cost	$          9,000.00
	Contribution	=selling price-variable cost
		=15000-9000
	Contribution per unit	$          6,000.00
	Fixed cost	$      12,000,000
	Break even point=	Fixed cost/contribution per unit
	Break even point=	12000000/6000
	Break even point=	2,000
Solution b
	Desired net income	$        1,020,000
	Tax rate	15%
	Pre-tax income required=	1020000/(1-15%)
	Pre-tax income required=	$        1,200,000
	Required sale units	=(Fixed cost+Required Profits)/Contribution per unit
		=(12000000+1200000)/6000
	No of units	2,200
Solution c
		Per unit	For 2200 units
	Sale	$             15,000	$       33,000,000
	Variable cost	$             (9,000)	$     (19,800,000)
	Contribution	$               6,000	$       13,200,000
	Fixed cost		$     (12,000,000)
	Profit before tax		$         1,200,000
	Tax @ 15%	1200000*15%	$          (180,000)
	Net income		$         1,020,000
Solution d
	Sale above BEP point	2200-2000
	Sale above BEP point	200.00	units
	Margin of safety=	200*15000
	Margin of safety=	$        3,000,000
Solution e
	Margin of safety percentage=	Margin of safety/Estimated sale
	Margin of safety percentage=	3000000/33000000
	Margin of safety percentage=	9.091%
	The percentage indicates that this much level of sale will generate net income
Solution f
	Operating leverage=	Contribution/(Contribution -fixed cost)
	Operating leverage=	13200000/(13200000-12000000)
	Operating leverage=	11.00
Solution g
	Increase in sale	10.00%
	Change in operating income	Increase in sale * Operating leverage
	Change in operating income	10%*11
	Change in operating income	110.00%