Question

Deckyard Company distributes a lightweight lawn chair that sells for $63 per unit. Variable expenses are $25.20 per unit, and fixed expenses total $264,600 annually. Required: 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in sales dollars. 3. The company estimates that sales will increase by $55,000 during the coming year due to increased demand. By how much should net operating income increase? 4. Assume that the operating results for last year were as follows: Sales $ 2,205,000 Variable expenses 882,000 Contribution margin 1,323,000 Fixed expenses 264,600 Net operating income $ 1,058,400 a. Compute the degree of operating leverage at the current level of sales. (Round your answers to 2 decimal places.) b. The president expects sales to increase by 16% next year. By how much should net operating income increase? 5. Refer to the original data. Assume that the company sold 45,500 units last year. The sales manager is convinced that a 14% reduction in the selling price, combined with a $47,500 increase in advertising expenditures, would increase annual unit sales by 50%. a. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places.) b. Would you recommend that the company do as the sales manager suggests? Yes No 6. Refer to the original data. Assume again that the company sold 45,500 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $4.00 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

Answer 1

1	Contribution Margin ratio	$
	Selling Price per unit	$63
	Less: Variable price per unit	$25.20
	contribution	$37.80
	contribution ratio (c/s)	60%
2	Breakeven point in sales:
	[Fixed cost]/contribution Margin ratio
	$264000/0.6	440000
3	Assume that there is no change in variable cost per unit and fixed cost
	Incremental increase : $55000*60%	$33,000
4	Given	$
	Sales	2205000
	Variable expense	882000
	contribution	1323000
	Fixed expenses	264600
	Net operating income	1058400
5a	Degree of operating leverage at the current level of sales
	Contribution Margin/Net operating income
	1323000/1058400	1.25
5b	The president expects sales to increase by 16% next year
	1.25*16% =20 % percent increase in NOI
	20% *1058400	211680