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Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Sales	$	35,000
Variable expenses		21,000
Contribution margin		14,000
Fixed expenses		8,400
Net operating income	$	5,600

9. What is the break-even point in dollar sales?

10. How many units must be sold to achieve a target profit of $8,400?

11. What is the margin of safety in dollars? What is the margin of safety percentage?

12. What is the degree of operating leverage? (Round your answer to 2 decimal places.)

Answer 1

Selling price per unit = 35,000/1,000

Selling price per unit = $ 35 per unit.

Variable cost per unit = 21,000/1,000

Variable cost per unit = $ 21 per unit.

1. Breakeven point in dollar sales = Fixed cost/Contribution margin ratio.

Contribution margin ratio = (sales - variable cost) /sales x 100

Contribution margin ratio = ( 35,000 - 21,000)/35,000 x 100

Contribution margin ratio = 40%.

Breakeven point in dollar sales = 8,400/40%

Breakeven point in dollar sales = $ 21,000.

2. Sales - variable cost = Fixed cost + profit.

Let number of units to be sold = X.

35 X - 21 X = 8,400 + 8,400

14 X = 16,800

X = 16,800/14

X = 1,200 units.

So 1,200 is the correct answer.

3. Margin of safety in dollars = Actual sales - breakeven sales.

Margin of safety in dollars = 35,000 - 21,000

Margin of safety in dollars = $ 14,000.

Hence, $ 14,000 is the correct answer.

Margin of safety in percentage = (Actual sales - breakeven sales)/actual sales x 100

Margin of safety in percentage = (35,000-21,000)/35,000 x 100

Margin of safety in percentage = 40%.

4. Degree of operating leverage = (Sales - variable cost) / (sales - variable cost - fixed cost)

Degree of operating leverage = ( 35,000-21,000)/(35,000 - 21,000 - 8,400)

Degree of operating leverage = 2.50

SUMMARY:

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