Question

Please answer Part 2 (b)

And please type your answer,hand-writing is sometimes hard to figure out

Before mid-night thanks

Part 1

Waterways has a sales mix of sprinklers, valves, and controllers as follows.

Annual expected sales: Sale of sprinklers 460,000 units at $26.50

Sale of valves 1,480,000 units at $11.20

Sale of controllers 60,000 units at $42.50

Variable manufacturing cost per unit: Sprinklers $13.96

Valves $ 7.95 Controllers $29.75

Fixed manufacturing overhead cost (total) $760,000

Variable selling and administrative expenses per unit: Sprinklers $1.30 Valves $0.50 Controllers $3.41 Fixed selling and administrative expenses (total) $1,600,000 Instructions

Part 2

The section of Waterways that produces controllers for the company provided the following information. Sales for month of February: 4,000 Variable manufacturing cost per unit: $9.75 Sales price per unit: $42.50 Fixed manufacturing overhead cost (per month for controllers): $81,000 Variable selling and administrative expenses per unit: $3.00 Fixed selling and administrative expenses (per month for controllers): $13,122 Instructions

(a) Using this information for the controllers, determine the contribution margin ratio, the degree of operating leverage, the break-even point in dollars, and the margin of safety ratio for Waterways Corporation on this product.

(b) What does this information suggest if Waterways’ cost structure is the same for the company as a whole?

Answer 1

PART 2:

(A)

Degree of operating leverage = Contribution margin / Net income

= $119,000 / $24,878

= 4.78

Contribution margin ratio = Contribution margin / sales

= $119,000 / $170,000

= 0.70

Break-even point sales = Fixec cost / Contribution margin rfatio

= $94,122 / 0.70

= $134,460

Margin of safety = Actual sales - Break-even point sales

= $170,000 - $134,460

= $35,540

Margin of safety ratio = (Margin sales / Actual sales) * 100

= ($35,540 / $170,000) *100

= 20.91%

(B)

The degree of operating leverage shows the ability of a firm to manage its fixed assets. It suggests that if the sale of Waterways decreases by 1%, its net income would decrease by 4.78 times.

The margin of safety is smaller in volume suggesting operational risk but it shows the existence of profit. The company should focus on reduction of cost as the marginal change in the demand would impact the profitability immensely.