Question

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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	$	20,300
Variable expenses		12,100
Contribution margin		8,200
Fixed expenses		6,232
Net operating income	$	1,968

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.)

10) How many units must be sold to achieve a target profit of $5,084? (Do not round intermediate calculations.)

11a) What is the margin of safety in dollars? (Do not round intermediate calculations.)

11b) What is the margin of safety percentage? (Round your final answers to the nearest whole percentage (i.e, .12 should be entered as 12).)

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

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).

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 $6,232 and the total fixed expenses are $12,100. 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.)

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 $6,232 and the total fixed expenses are $12,100. 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).

Answer 1

Solution:

9)

9) Break Even Point in dollar sales
Total Fixed Cost	$6,232
CM Ratio (Contribution Margin 8200 / Sales 20,300 x 100)	40.3941%
Break Even Point in Sales Revenue (Fixed Cost / CM Ratio)	$15,428

10)

Contribution Margin per unit = Total Contribution Margin 8200 / 1000 Units = $8.20 per unit

Number of Units to be sold to achieve target profit = (Total Fixed Cost 6232 + Target Profit 5084) / Contribution margin per unit 8.2

= 1380 Units

11a)

Margin of Safety in dollars = Total Sales Revenue 20,300 – Break Even Sales in dollars $15,428

= $4,872

11b)

Margin of Safety percentage = Margin of Safety in dollars 4872 / Total Sales 20,300 x 100

= 24%

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