Question

Break-Even Units, Contribution Margin Ratio, Multiple-Product Breakeven, Margin of Safety, Degree of Operating Leverage

Jellico Inc.'s projected operating income (based on sales of 450,000 units) for the coming year is as follows:

	Total
Sales	$ 13,050,000
Total variable cost	8,482,500
Contribution margin	$ 4,567,500
Total fixed cost	2,472,540
Operating income	$ 2,094,960

Required:

1(a). Compute variable cost per unit. Enter your answer to the nearest cent.
$per unit

1(b). Compute contribution margin per unit. Enter your answer to the nearest cent.
$per unit

1(c). Compute contribution margin ratio.
%

1(d). Compute break-even point in units.
units

1(e). Compute break-even point in sales dollars.
$

2. How many units must be sold to earn operating income of $318,710?
units

3. Compute the additional operating income that Jellico would earn if sales were $50,000 more than expected.
$

4. For the projected level of sales, compute the margin of safety in units, and then in sales dollars.

Margin of safety in units		units
Margin of safety in sales dollars	$

5. Compute the degree of operating leverage. Round your answer to one decimal place.

6. Compute the new operating income if sales are 10% higher than expected. Enter your answer to the nearest cent.
$

Answer 1

1.a. Variable cost per unit = Total variable cost/Number of units

= 8,482,500/450,000

= $18.85

b.Contribution Margin per unit = Total contribution margin/Number of units

= 4,567,500/450,000

= $10.15

CM Ratio = Contribution Margin/Sales

= 10.15/(18.85+10.15)

= 35%

d.Break even point in units = Fixed costs/CM per unit

= 2,472,540/10.15

= 243,600 units

e.Break even point in Sales Dollars = Fixed costs/Contribution Margin Ratio

= 2,472,540/35%

= $7,064,400

2.Units required to be sold = (Target Income + Fixed costs)/Contribution Margin per unit

= (318,710+2,472,540)/10.15

= 275,000 units

3.Additional income = Additional contribution margin

= 50,000*35%

= $17,500

4.Magin of safety in units = Total sales – break even sales

= 450,000-243,600

= 206,400 units

In Dollars = 206,400*29

= $5,985,600

DOL = Contribution Margin/Net operating income

= 4,567,500/2,094,960

= 2.18

i.e 2.2

6.New operating income = 2,094,960+2,094,960*10%*2.2

= $2,555,851.2