Question

Flora’s Flats produces comfortable and portable women’s shoes designed to be worn as a second pair of shoes after a formal event. The company has the following financial information:
The company’s sales price is $20 per unit. The variable costs of producing flats is $6 per unit. The company expects to have fixed costs of $10,000 next year. The company expects to sell 1,000 pairs of flats next year. Assume no taxes.
a.) Calculate the breakeven point in units.
b.) Calculate the breakeven point in dollars.
c.) How many units must the company sell to reach a target profit of $25,000?
d.) Prepare a budgeted contribution format income statement.
e.) Compute the margin of safety in both dollar and percentage terms.
f.) Compute the degree of operating leverage.
g.) If sales increase by 20% in the following year, how much would net income increase

Answer 1

Given,
Sale price = 20/unit
variable cost = 6/unit
Fixed cost = 10,000
Contribution = 20-6 = 14/unit
a)	Break even point (units) = Total Fixed cost / contribution per unit
			= 10,000 / 14
			= 715
b)	Break even point (dollars) = Break even point(units) * sale price
			= 715 * 20
			= 14,300
c)	Target profit = 25,000
	(i.e) Required contribution = target profit + fixed cost
			= 25,000 + 10,000
			= 35,000
	Units company should sell to get target profit = 35,000 / 14
					= 2,500 units
d)	Income Statement :
	Particulars			Amount
	Budgeted Sales (1,000 *20)			20,000
	(-) variable cost @ 6			(6,000)
	Budgeted Contribution			14,000
	(-) Fixed cost			(10,000)
	Budgeted Profit			4,000
e)	Margin of safety (Dollar) = Total sales - Break even point (Dollars)
			= 20,000 - 14,300
			= 5,700
	Margin of safety (Percentage) = Margin of safety (Dollar) / Sales * 100
			= 5,700 / 20,000 * 100
			= 28.5%
f)	Degree of operating leverage = (Sales - variable cost) / (Sales - variable cost - fixed cost)
			= (20,000 - 6,000) / (20,000 - 6,000 - 10,000)
			= 3.5
g)	Sales units = 1,000 * 120% = 1200
	Contribution = 1,200 * 14
		= 16,800
	Profit = 16,800 - 10,000
	= 6,800
	Net Income increase = 6,800 - 4,000
			= 2,800