Question

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Sales	$	21,200
Variable expenses		12,400
Contribution margin		8,800
Fixed expenses		6,952
Net operating income	$	1,848

1.

value:
10.00 points

Required information

Required:

1.	What is the contribution margin per unit? (Round your answer to 2 decimal places.)

       

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

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2.

value:
10.00 points

Required information

2.	What is the contribution margin ratio? (Enter your answer as a percentage rounded to 2 decimal places (i.e., 0.13579 should be entered as 13.58).)

  

       

rev: 09_27_2017_QC_CS-101601

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

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3.

value:
10.00 points

Required information

3.	What is the variable expense ratio? Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

       

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

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4.

value:
10.00 points

Required information

4.	If sales increase to 1,001 units, what would be the increase in net operating income? (Round your answer to 2 decimal places.)

       

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

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5.

value:
10.00 points

Required information

5.	If sales decline to 900 units, what would be the net operating income? (Do not round intermediate calculations.)

       

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

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6.

value:
10.00 points

Required information

6.	If the selling price increases by $2.40 per unit and the sales volume decreases by 100 units, what would be the net operating income? (Do not round intermediate calculations.)

       

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

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7.

value:
10.00 points

Required information

7.	If the variable cost per unit increases by $1.40, spending on advertising increases by $1,900, and unit sales increase by 250 units, what would be the net operating income? (Do not round intermediate calculations.)

       

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

8.

value:
10.00 points

Required information

8.	What is the break-even point in unit sales? (Do not round intermediate calculations.)

       

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

9.

value:
10.00 points

Required information

9.	What is the break-even point in dollar sales? (Round intermediate calculations to 4 decimal places. Round your final answer to the nearest dollar amount.)

       

rev: 03_10_2015_QC_CS-10418

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

10.

value:
10.00 points

Required information

10.	How many units must be sold to achieve a target profit of $5,324? (Do not round intermediate calculations.)

        

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

11.

value:
10.00 points

Required information

11-a.

What is the margin of safety in dollars? (Do not round intermediate calculations.)

        

11-b.

What is the margin of safety percentage? (Round your final answers to the nearest whole percentage (i.e, .12 should be entered as 12).)

           

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

12.

value:
10.00 points

Required information

12.	What is the degree of operating leverage? (Round your answer to 2 decimal places.)

         

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

13.

value:
10.00 points

Required information

13.	Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 4% increase in sales? Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

  
         

rev: 03_10_2015_QC_CS-10418

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

14.

value:
10.00 points

Required information

14.

Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $6,952 and the total fixed expenses are $12,400. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage? (Round your answer to 2 decimal places.)

  
         

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

15.

value:
10.00 points

Required information

15.

Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $6,952 and the total fixed expenses are $12,400. Given this scenario, and assuming that total sales remain the same, calculate the degree of operating leverage. Using the calculated degree of operating leverage, what is the estimated percent increase in net operating income of a 4% increase in sales? Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

  
         

rev: 03_10_2015_QC_CS-10418

eBook & Resources

eBook: Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.eBook: Compute the margin of safety and explain its significance.eBook: Determine the break-even point.eBook: Determine the level of sales needed to achieve a desired target profit.eBook: Explain how changes in activity affect contribution margin and net operating income.eBook: Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.eBook: Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

Check my work

Answer 1

1.Contribution Margin per Unit = Selling Price – Variable Cost

=21,200/1000 – 12400/1000

=$8.8

2. Contribution Margin ratio = Contribution/Sales * 100

= 8800/21200*100 = 41.51%

3. variable Expense Ratio = Variable Cost/Sales * 100

=12400/21200*100 = 58.49%

4.Sales increase to 1001 units

Sales = 21200*1001/1000 = 21221.2

Variable Cost = 12400*1001/1000 = 12412.4

Contribution = 8808.8

Fixed Expenses = 6952

Operating Income = $1,856.8

Hence, increase in Net Operating Income = 1856.8 – 1848 = $8.8

Which is equal to contribution per unit

Since fixed expenses remain same

5.Net Operating Income at 900 units = 1848 – 8.8*100 = $968

6.Sales = (21.2+2.4)*900 = 21,240

Less: Variable cost = 12400*900/1000 = 11,160

Contribution = 10,080

Less: Fixed Expenses 6952

Net Opertaing Income = $3,128

7.Sales = 26,500

Less: Variable cost 17,250

Contribution = 9,250

Less: Fixed Expenses 6952+1900 = 8852

Net Operating Income = $398

8.Break even point = Fixed Expenses/Contribution per Unit

=6952/8.8 = 790 units

9. Break even point in $ Sales = 790*21.2 = $16,748

10. Target Profit = 5324

+ Fixed Expenses 6952

Required Contribution = 12,276

Contribution per Unit = 8.8

No. Of units required to be sold = 1395

11-a.Margin of Safety in $ = Sales – Break even Sales

= 21200-16748 = $4,452

11-b.Margin of Safety percentage = 4452*100/21200 = 21%