Question

A company sells clocks for $40 each. Its variable cost per unit is $32, and its fixed cost per year is $20,000.

1. If it sells 12,500 clocks this year, what is its contribution margin?

2. If it sells 12,500 clocks this year, what is its operating income?

3. If it sells 12,500 clocks this year, what is its operating leverage?

4. If it sells 12,500 clocks this year, what would be the percentage change in its operating income if it sells 12% more clocks next year?

5. What is the company’s contribution margin per unit?

6. What is the company’s contribution margin ratio?

7. How many units must the company sell to break even?

8. What amount of sales dollars is needed to breakeven?

9. How many units must the company sell to earn an operating income of $60,000?

10. What amount of sales dollars is needed to earn an operating income of $60,000?

11. If the company is currently selling and expects to sell 12,500 clocks, what is the margin of safety in units?

12. If the company is currently selling and expects to sell 12,500 clocks, what is the margin of safety in sales dollars?

13. If the company is currently selling and expects to sell 12,500 clocks, what is the margin of safety percentage?

Answer 1

1. Contribution margin per Unit = Selling Price Per Unit - Variable Cost Per Unit

= $ 40 - $ 32

= $ 8

Total Clocks Sold = 12,500

Hence, Contribution margin Total = Contribution margin per Unit * Total Clocks

= $ 8 * 12,500 Clocks

= $ 100,000

Hence the correct answer is $ 100,000

2. Operating Income = Contribution margin Total - Fixed Cost

= $ 100,000 - $ 20,000

= $ 80,000

Hence the correct answer is $ 80,000

Note : Contribution Margin is as calculated in 1 above.

3. Operating Leverage = Contribution Margin / Operating Income

= $ 100,000 / $ 80,000

= 1.25

Hence the correct answer is  1.25

4.

Sales this year = 12,500

Operating Income at 12,500 = $ 80,000

At 12,500 Contribution Margin Ratio = Contribution Margin / Sales *100

= $ 8 / 40 *100

= 20%  

Sales next year = 12,500 * 112%

= 14,000 Clocks

Contribution Margin = 14,000 Clocks * $ 8

= $ 112,000

Hence, Operating Income = Contribution Margin - Fixed Cost

=$ 112,000 - $ 20,000

= $ 92,000

Hence the  percentage change in its operating income = ($92,000 - $ 80,000) / $ 80,000 *100

= $ 12,000 /80,000*100

15%

Hence the correct answer is 15%