Question

Waterways Continuing Problem 06 a (Part 3)

The section of Waterways that produces controllers for the company provided the following information.

Sales in units for month of February		3,800
Variable manufacturing cost per unit		$9.00
Sales price per unit		$41.00
Fixed manufacturing overhead cost (per month for controllers)		$83,000
Variable selling and administrative expenses per unit		$3.30
Fixed selling and administrative expenses (per month for controllers)		$12,200

Using this information for the controllers, determine the contribution margin ratio, the degree of operating leverage, the break-even point in dollars, and the margin of safety ratio for Waterways Corporation on this product.

Contribution Margin Ratio (Round to 0 decimal places, e.g. 25%.)			%
Degree of Operating Leverage (Round to 2 decimal places, e.g. 5.25.)
Break-even Point in Dollars		$
Margin of Safety Ratio (Round to 1 decimal place, e.g. 5.2%.)			%

Answer 1

Answer of Part a:

Variable Cost per unit = Variable Manufacturing Cost per unit + Variable Selling and Administrative Expenses per unit
Variable Cost per unit = $9.00 + $3.30
Variable Cost per unit = $12.30

Contribution Marin per unit = Selling price per unit – Total Variable Cost per unit
Contribution Margin per unit = $41.00 - $12.30
Contribution Margin per unit = $28.70

Contribution Margin Ratio = Contribution Margin per unit / Selling price per unit
Contribution Margin Ratio = $28.70 / $41.00
Contribution Margin Ratio = 0.7 or 70%

Answer of Part b:

Contribution Margin = Contribution Margin per unit * Sales in units
Contribution Margin = $28.70 * 3,800
Contribution Margin = $109,060

Total Fixed Cost = Fixed Manufacturing Overhead cost + Fixed Selling and Administrative Expenses
Total Fixed Cost = $83,000 + $12,200
Total Fixed Cost = $95,200

Net Operating Income = Contribution Margin - Fixed Cost
Net Operating Income = $109,060 - $95,200
Net Operating Income = $13,860

Degree of Operating Leverage = Contribution Margin / Net Operating Income
Degree of Operating Leverage = $109,060 / $13,860
Degree of Operating Leverage = 7.87

Answer of Part c:

Break Even Point in Dollars = Total Fixed Cost / Contribution Margin ratio
Break Even Point in Dollars = $95,200 / 0.7
Break Even Point in Dollars = $136,000

Answer of Part d:

Actual Sales = Sales in units * Selling Price per unit
Actual Sales = 3,800 * $41.00
Actual Sales = $155,800

Margin of Safety Ratio = (Actual Sales - Break Even Point in Dollars) / Actual Sales
Margin of Safety Ratio = ($155,800 - $136,000) / $155,800
Margin of Safety Ratio = 0.127 or 12.7%