In: Accounting
Tyrene Products manufactures recreational equipment. One of the company’s products, a skateboard, sells for $49. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totalling $34.30 per skateboard, of which 70% is direct labour cost. |
Over the past year the company sold 58,000 skateboards, with the following operating results: |
Sales (58,000 skateboards) | $ | 2,842,000 |
Variable expenses | 1,989,400 | |
Contribution margin | 852,600 | |
Fixed expenses | 705,600 | |
Net operating income | $ | 147,000 |
Management is anxious to maintain and perhaps even improve its present level of income from the skateboards. |
Required: |
1a. |
Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number.) |
1b. |
Compute the degree of operating leverage at last year's level of sales. (Round your answer to 2 decimal places.) |
2. |
Due to an increase in labor rates, the company estimates that variable costs will increase by $4.90 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $49.00, what will be the new CM ratio and the new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number. ) |
3. |
Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $147,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) |
4. |
Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places. ) |
5. |
Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 30%, but it would cause fixed costs to increase by 86%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number .) |
6. |
Refer to the data in (5) above. |
a. |
If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $147,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) |
b-1. |
Assume that the new plant is constructed and that next year the company manufactures and sells 58,000 skateboards (the same number as sold last year). Prepare a contribution format income statement. (Input all amounts as positive values except losses which should be indicated by minus sign. ) |
b-2. | Compute the degree of operating leverage. (Round your answer to 2 decimal places.) |
Question - 1a
CM Ratio = Contribution Margin / sales * 100 = 852600 / 2842000 * 100 = 30%
Contribution margin per skateboard = 852600 / 58000 = 14.7
Breakeven point in number of skate boards = Fixed expenses / CM per skateboard = 705600 / 14.7 = 48000
Question - 1b
Degree of Operating leverage = Contribution / EBIT = 852600 / (852600 - 705600) = 5.8 times
Question - 2
Current variable cost = 34.30. Expected increase in variable cost per skateboard = 4.90.
So New variable cost per skateboard = 34.30 + 4.90 = 39.20
Selling price = 49
Contribution margin per skateboard = 49 - 39.20 = 9.8
Contribution margin ratio = 9.8 / 49 * 100 = 20%
Breakeven point = 705600 / 9.8 = 72000 skateboards.
Question - 3
Number of skateboards to sold = (Fixed expenses + desired profit) / CM per Unit
= ( 705600 + 147000) / 9.8 = 87000 skateboards
Question - 4
Let the selling price = X
(X - 39.20) / X = 0.30 .......... CM ratio of previous year.
X - 39.20 = 0.30X
0.70 X = 39.2
X = 56 ............. Thus new selling price should be $ 56 per skate board
Question - 5
Variable cost after decrease = 34.30 * (0.70) = 24.01
Selling price = 49
Contirbution margin per skateboard = 49 - 24.01 = 24.99
CM ratio = 24.99 / 49 * 100 = 51%
Breakeven point = Fixed expenses / CM per skateboard = 705600 * (1.86) / 24.99 = 52,518 skateboards
Note current fixed expenses are multiplied with 1.86, since there is 86% increase in such expenses.
Question - 6a
Number of skateboards to be sold = [ 705600 * (1.86) + 147000 ] / 24.99 = 58400 skateboards
Question - 6b1
Sales = 58000 * 49 | 2842000 |
(-) Variable cost @ 24.01 | 1392580 |
Contribution Margin | 1449420 |
(-) Fixed cost | 1312416 |
Net operating Profit | 137004 |
Question - 6b2
Degree of operating leverage = Contribution / Net operating Income = 1449420 / 137004 = 10.58 : 1