Question

1. 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	$9,000,000
   Total variable cost	$6,300,000
   Contribution margin	$2,700,000
   Total fixed cost	$1,824,000
   Operating income	$ 876,000

   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 $240,000?
      _______ 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	Sales per unit($9,000,000/450,000 units)	$20
1.b	Less:Variable cost per unit($6,300,000/450,000 units)	$14
1.c	Contribution margin per unit	$6
	Total fixed cost	$18,24,000
	Contribution margin ratio($6/$20)	30%
1.d	Breakeven sales in units($1,824,000/$6)	304000	units
1.e	Breakeven sales in $($1,824,000/30%)	$60,80,000
2	Required operating income	$2,40,000
	Add:fixed cost	$18,24,000
	Required contribution	$20,64,000
	Required sales in units($2,064,000/$6)	3,44,000	units
3	Revised Sales	$90,50,000
	Sales per unit($9,050,000/450,000 units)	$20.11
	Less:Variable cost per unit($6,300,000/450,000 units)	$14
	Contribution margin per unit	$6.11
	Contribution margin(450,000*$6.11)	$27,50,000
	Less:Total fixed cost	$18,24,000
	Operating income	$9,26,000
4	Sales in units	450000	units
	Less:Breakeven sales in units	304000	units
	Margin of safety in units	146000	units
	Margin of safety in $(146,000 units*$20)	$29,20,000
5	Degree of operating leverage =(Sales - Variable cost) / Sales
	Degree of operating leverage =($9,000,000 - $6,300,000) / $876,000 =3.08
6	Revised Sales	$99,00,000
	Sales per unit($9,050,000/450,000 units)	$22.00
	Less:Variable cost per unit($6,300,000/450,000 units)	$14
	Contribution margin per unit	$8.00
	Contribution margin(450,000*$8)	$36,00,000
	Less:Total fixed cost	$18,24,000
	Operating income	$17,76,000