Question

Break-Even in Units, Target Income, New Unit Variable Cost, Degree of Operating Leverage, Percent Change in Operating Income

Reagan, Inc., has developed a chew-proof dog bed—the Tuff-Pup. Fixed costs are $176,000 per year. The average price for the Tuff-Pup is $35, and the average variable cost is $24 per unit. Currently, Reagan produces and sells 20,000 Tuff-Pups annually.

Required:

1. How many Tuff-Pups must be sold to break even?
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units

2. If Reagan wants to earn $61,600 in profit, how many Tuff-Pups must be sold?
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units

Prepare a variable-costing income statement to verify your answer.

Reagan, Inc.
Variable-Costing Income Statement

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3. Suppose that Reagan would like to lower the break-even units to 8,800. The company does not believe that the price or fixed cost can be changed. Calculate the new unit variable cost that would result in break-even units of 8,800. If required, round your intermediate computations and final answer to the nearest cent.
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4. What is Reagan’s current contribution margin and operating income?

Current contribution margin   $fill in the blank 162c83015fd2017_2
Current operating income   $fill in the blank 162c83015fd2017_3
Calculate the degree of operating leverage. Round your answer to three decimal places.
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If sales increased by 10 percent next year, what would the percent change in operating income be? Use your rounded answer to the question above in your computations, and round your final percentage answer to two decimal places (for example, 45.555% would be entered as "45.56").
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%

What would the new total operating income for next year be? Round your answer to the nearest dollar.
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Answer 1

Requirement 1: Calculation of Break-even Point:

Break-even Point(in units)=	Fixed Cost/ Contribution per unit
Contribution per unit= (Selling Price-Variable Cost)	$35-$24= $11
Break-even Point=	$176,000/$11	16,000 units

Requirement 2: Calculation of units required to be sold:

Units Required=	{Fixed Cost+ Desired Profit}/ Contribution per unit
Units Required=	{$176,000+$61,600}/$11	21,600 units

Variable-Costing Income Statement:

Reagan, Inc. Variable-Costing Income Statement
Sales (21,600 units*$35)	$756,000
Less: Variable Cost (21,600*$24)	$518,400
Contribution Margin	$237,600
Less: Fixed Expenses	$176,000
Operating Income	$61,600

Requirement 3: Calculation of new variable Cost:

New Break Even Point (given)=	8,800 units
New Contribution margin per unit= Fixed Cost/ BEP Units	$176,000/8,800	$20 per unit
New Variable Cost= Selling Price-Contribution per unit	$35-$20	$15 per unit

Requirement 4:

Current contribution margin	20,000 units*$11	$220,000
Current operating income	$220,000-$176,000	$44,000

Requirement 5:

Degree of Operating Leverage=	Contribution Margin/ Operating Income
Degree of Operating Leverage=	$220,000/ $44,000=5	5.000

(a)If sales Increased by 10 %:

% change in Operating Income=	%sales Increase* Degree of Operating Leverage
% change in Operating Income=	10%*5.000= 50.00%	50.00%

(b) New total operating income for next year= $44,000* 150%= $66,000