Question

Dana’s Ribbon World makes award rosettes. Following is information about the company:

Variable cost per rosette	$	1.60
Sales price per rosette		3.00
Total fixed costs per month		889.00

Required:
1.	Suppose Dana’s would like to generate a profit of $800. Determine how many rosettes it must sell to achieve this target profit. (Round your intermediate calculations to 2 decimal places and final answer up to next whole number.)
	Target Units 1,206

    

2.	If Dana’s sells 1,100 rosettes, compute its margin of safety in units, in sales dollars, and as a percentage of sales. (Round your intermediate calculations, Margin of Safety in Dollars and percentage answers to 2 decimal places.)
	Margin of Safety (Units) 465 Rosettes Margin of Safety in Dollars $1,395.00 Percentage of Sales 42.27 %

   

3.	Calculate Dana’s degree of operating leverage if it sells 1,100 rosettes. (Round your intermediate calculations to 2 decimal places and final answer to 4 decimal places.)
	Degree of Operating Leverage ?

    

4.	Using the degree of operating leverage, calculate the change in Dana’s profit if unit sales drop to 935 units. Confirm this by preparing a new contribution margin income statement. (Round your intermediate calculations to 4 decimal places and final answer to 2 decimal places.)
	Contribution Margin Income Statement For 935 Rosettes Sales Revenue ? Variable Costs ? Contribution Margin $1,309 Fixed Costs 889 Income from Operations $420

Answer 1

Answer 3.

Number of rosettes sold = 1,100
Sales price per rosette = $3.00
Variable cost per rosette = $1.60
Fixed costs = $889

Contribution Margin = Number of rosettes sold * (Sales price per rosette - Variable cost per rosette)
Contribution Margin = 1,100 * ($3.00 - $1.60)
Contribution Margin = $1,540

Income from Operations = Contribution Margin - Fixed costs
Income from Operations = $1,540 - $889
Income from Operations = $651

Degree of Operating Leverage = Contribution Margin / Income from Operations
Degree of Operating Leverage = $1,540 / $651
Degree of Operating Leverage = 2.37

Answer 4.

If unit sales dropped to 935 units:

% change in sales = (New Unit Sale - Old Unit Sale) / Old Unit Sale
% change in sales = (935 - 1,100) / 1,100
% change in sales = -15%

Degree of Operating Leverage = % change in Income from Operations / % change in sales
2.37 = % change in Income from Operations / -15%
% change in Income from Operations = -35.55%

New Income from Operation = $651 * (100% - 35.55%)
New Income from Operation = $420