Question

Cantor Products sells a product for $83. Variable costs per unit are $46, and monthly fixed costs are $125,800.   

a. What is the break-even point in units?



b. What unit sales would be required to earn a target profit of $321,900?



c. Assume they achieve the level of sales required in part b, what is the degree of operating leverage? (Round your answer to 3 decimal places.)

   

d. If sales decrease by 30% from that level, by what percentage will profits decrease? (Do not round intermediate calculation. Round your answer to 2 decimal places.)

c. What sales revenue is needed to achieve a $332,250 per month profit?

Answer 1

a.

Break even in point

=

Fixed Cost/Contribution margin per unit

=

$ 1,25,800

/

$ 37

=

3,400

Working;

Contribution margin per unit

=

Sales - Variable cost

=

$             83

-

$                46

=

$             37

b.

Unit sales

=

Target Contribution margin

/

Contribution margin per unit

=

$          4,47,700

/

$          37

=

12,100

Working:

Target Contribution margin

=

Fixed Cost + Target profit

=

$ 1,25,800

+

321900

=

$ 4,47,700

c.

Degree of operating leverage

=

Contribution margin/Net operating income

=

$ 4,47,700

/

$    3,21,900

=

1.391

Working:

Per Unit

Total

Sales

$             83

$ 10,04,300

Variable cost

$             46

$   5,56,600

Contribution margin

$             37

$   4,47,700

Fixed cost

$   1,25,800

Net Operating income

$   3,21,900

e.

Decrease in profit

=

Decrease in sales x degree of operating leverage

=

30%

x

1.391

=

41.72%

f.

Sales revenue

=

Target contribution margin

/

Contribution margin ratio

=

$          4,58,050

/

44.58%

=

$       10,27,518

Working:

Contribution margin ratio

=

Contribution margin / Sales

=

$             37

/

$                83

=

44.58%

Target contribution margin

=

Fixed cost+Target profit

=

$ 1,25,800

+

3,32,250

=

$ 4,58,050