Question

Risk assessment calculations

Baseline information: 40,000 units sold at a unit selling price of $100,

variable costs of $80 per unit, fixed costs of $750,000

1. Calculate the contribution margin per unit in dollars and as a percentage

2. Prepare a financial report in the contribution margin format

Calculate the breakeven point in dollars and unit sales

4. Prove the validity of the breakeven calculation by preparing a financial

report using the contribution margin format

5. Calculate the performance level in unit sales to earn net income of

$100,000

6. Prove the validity of the desired net income calculation by preparing a

financial report using the contribution margin format

7. Calculate the degrees of operating leverage

ithout preparing a financial report, calculate the increase in net income

f the number of units sold increased by 10%

9. Prove the validity of the operating leverage calculation by preparing a

financial report using the contribution margin format and assuming a 10%

increase in units sold

What-if calculation

Calculate net income resulting from these changes to the baseline

information: units sold and selling price remained the same, variable costs

were increased by $10, and fixed costs were decreased by $250,000

Answer 1

SOLUTION

1. Contribution margin per unit = Sales price - Variable costs

= $100 - $80 = $20

Contribution margin ratio = Contribution margin per unit / Sales price * 100

= $20 / $100 * 100 = 20%

2. Contribution margin format

Particulars	Amount ($)
Sales price (40,000*$100)	4,000,000
Variable cost (40,000*$80)	3,200,000
Contribution margin	800,000
Fixed Expenses	750,000
Net Operating Income	50,000

Breakeven point in sales units = Fixed expense / Contribution margin per unit

= $750,000 / $20 = 37,500 units

Breakeven point in dollars = Fixed expense / Contribution margin ratio

= $750,000 / 20% = $3,750,000

4. Contribution margin format

Particulars	Amount ($)
Sales price (37,500*$100)	3,750,000
Variable cost (37,500*$80)	3,000,000
Contribution margin	750,000
Fixed Expenses	750,000
Net Operating Income	0

4. Performance level in unit sales = (Fixed cost + Desired profit) / Contribution margin per unit

= ($750,000 + $100,000) / $20

= $850,000 / $20

= 42,500 units