Question

Tyrene Products manufactures recreational equipment. One of the company’s products, a skateboard, sells for $30. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totalling $18.00 per skateboard, of which 60% is direct labour cost.

Over the past year the company sold 51,000 skateboards, with the following operating results:

Sales (51,000 skateboards)	$	1,530,000
Variable expenses		918,000
Contribution margin		612,000
Fixed expenses		492,000
Net operating income	$	120,000

Management is anxious to maintain and perhaps even improve its present level of income from the skateboards.

Required:

1a.	Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number.)

         

1b.	Compute the degree of operating leverage at last year's level of sales. (Round your answer to 2 decimal places.)

         

2.

Due to an increase in labor rates, the company estimates that variable costs will increase by $2.40 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $30.00, what will be the new CM ratio and the new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number. )

         

3.	Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

          

4.

Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places. )

         

5.

Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 80%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number .)

         

6.	Refer to the data in (5) above.

a.	If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

         

b-1.	Assume that the new plant is constructed and that next year the company manufactures and sells 51,000 skateboards (the same number as sold last year). Prepare a contribution format income statement. (Input all amounts as positive values except losses which should be indicated by minus sign. )

         

b-2.	Compute the degree of operating leverage. (Round your answer to 2 decimal places.)

         

Answer 1

Contribution Margin = Sales – Variable cost

= 30 – 18

= $12

CM Ratio = 12/30

= 40%

Break even point in skateboards = Fixed costs/CM per unit

= 492000/12

= 41,000 skateboards

Degree of operating leverage = Contribution Margin/Net Operating income

= 612000/120000

= 5.1 times

2.CM ratio = (30-18-2.4)/30 = 32%

Unit Sales required to break even = 492,000/9.6

= 51,250 units

3.Number of skateboards required = (120,000+492,000)/9.6

= 63,750 skateboards

4.Required selling price = Variable cost/Variable cost ratio

= 20.4/60%

= $34

5/. CM Ratio = (30-10.8)/30 = 64%

Break even units = 492,000*1.8/19.2

= 46,125 units

Number of skateboards = (120000+885600)/19.2

= 52,375 skateboards

b.

Contribution format Income Statement
Sales	1,530,000
Variable Expenses	550,800
Contribution Margin	979,200
Fixed Expenses	885600
Net Operating Income	93,600

Degree of operating leverage = 979200/93600 = 10.4615