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In: Accounting

Break-Even Units, Contribution Margin Ratio, Multiple-Product Breakeven, Margin of Safety, Degree of Operating Leverage Jellico Inc.'s...

  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.

Solutions

Expert Solution

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

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