Question

Black Pearl sells a single product. The company's most recent I/S includes the following information

Sales 75000

Variable Manufacturing costs 30,000

Variable Period expenses 10,000

Fixed Manufacturing costs 8,000

Fixed period costs 9,000

A) Determine contribution margin ratio

b) determine gross profits

c) determine breakeven point in sales

d) determine the margin of safety in dollars

e) determine sales dollars to achieve $42,000 in after-tax income (assume 25% tax rate)

F) Determine the operating leverage at the sales of $75,000

Answer 1

Answer A.

Contribution margin = Sales - Variable manufacturing costs - Variable period expenses
Contribution margin = $75,000 - $30,000 - $10,000
Contribution margin = $35,000

Contribution margin ratio = Contribution margin / Sales
Contribution margin ratio = $35,000 / $75,000
Contribution margin ratio = 46.67%

Answer B.

Gross Profits = Sales - Variable manufacturing costs - Fixed manufacturing costs
Gross Profits = $75,000 - $30,000 - $8,000
Gross Profits = $37,000

Answer C.

Fixed costs = Fixed manufacturing costs + Fixed period costs
Fixed costs = $8,000 + $9,000
Fixed costs = $17,000

Breakeven point in sales = Fixed costs / Contribution margin ratio
Breakeven point in sales = $17,000 / 0.4667
Breakeven point in sales = $36,426

Answer D.

Margin of safety in dollars = Sales - Breakeven point in sales
Margin of safety in dollars = $75,000 - $36,426
Margin of safety in dollars = $38,574

Answer E.

Before-tax income = After-tax income / (1 - Tax rate)
Before-tax income = $42,000 / (1 - 0.25)
Before-tax income = $56,000

Required sales in dollars = (Fixed costs + Before-tax income) / Contribution margin ratio
Required sales in dollars = ($17,000 + $56,000) / 0.4667
Required sales in dollars = $156,417

Answer F.

Net operating income = Contribution margin - Fixed costs
Net operating income = $35,000 - $17,000
Net operating income = $18,000

Operating leverage = Contribution margin / Net operating income
Operating leverage = $35,000 / $18,000
Operating leverage = 1.94