Question

The Yucki Candy Co. makes and sells boxes of chocolate candy. Yucki has fixed expenses of $195,000 each month plus variable expenses of $6.00 per box of candy. Yucki sells each box of candy for $10.00.

• Compute the contribution margin of each box of candy.

• Compute the number of boxes of candy that Yucki must sell each month to break even. Round up to the nearest whole box.

• Compute the contribution margin ratio for a box of candy

.

• Compute the dollar amount of monthly sales Yucki needs to earn $2500,000 in profit. (Round the contribution margin ratio to four decimal places. Round sales up to the nearest dollar.)

• Prepare Yucki’s contribution margin income statement for June for sales of 275,000 boxes of candy.

• What is the degree of leverage for June sales of 275,000 boxes of candy? (Carry answer out to four decimal places.)

• What is June’s margin of safety (in dollars and cents)?

• By what percentage will operating income change if June’s sales volume is 25% higher? (Round to two decimal places.)

• Prove your answer by comparing the difference in operating income after the change with the operating income before the change.

Answer 1

1) calculation of contribution margin

Contribution margin per box = selling price per box - variable cost per box

= $10 - $6

= $4 per box

2) calculation of break even point:

Break even point ( in box) = Fixed cost/ contribution margin per box

= $195000/$4

= 48,750 boxes

Candy must sell 48,750 boxes each month to break even

3) calculation of contribution margin ratio

Contribution margin ratio

= contribution margin per box/ selling price per box

= $4/$10

= 40%

4) calculation of monthly sales to earn profit of $2,500,000

Target sales

= (Fixed cost + required profit)/contribution margin ratio

= ($195,000 + $2,500,000)/40%

= $6,737,500

5) contribution margin income statement:

Particulars	amount
Sales (275,000×$10)	$2,750,000
Less: variable cost (275,000×$6)	($1,650,000)
Contribution margin	$1,100,000
Less: Fixed cost	($195,000)
Operating income	$905,000

6) calculation of degree of operating leverage for sales of 275,000 boxes:

Degree of Operating leverage

= contribution margin / operating income

= $1,100,000/$905,000

= 1.2154

7) calculation of margin of safety:

Margin of safety (in dollars) = Total sales - break even sales

= $2,750,000 - (48,750×$10)

= $2,262,500

Margin of safety (in %)

= (Total sales - break even sales)/Total sales

= ($2,750,000 - $487,500)/$2,750,000

= 82.27%

8) calculation of change in operating income:

Particulars	amount
Sales ($2,750,000+25%)	$3,437,500
Less: variable cost ($1,650,000+25%)	($2,062,500)
Contribution margin	$1,375,000
Less: Fixed cost	($195,000)
Operating income (after 25% increase of sales volume)	$1,180,000
Operating income before increase	$905,000
Change in operating income ($1,180,000 - $905,000)	$275,000

Percentage change in operating income

= % increase in sales volume × operating leverage

= 25%×1.2154

= 30.38%

Percentage change in operating income

= change in operating income / operating income before income in sales volume

= $275,000/$905,000

= 30.38%