Question

In: Accounting

A company sells clocks for $20 each. Its variable cost per unit is $14, and its...

A company sells clocks for $20 each. Its variable cost per unit is $14, and its fixed cost per year is $9,000.

1. If it sells 2,000 clocks this year, what is its contribution margin?

2. If it sells 2,000 clocks this year, what is its operating income?

3. If it sells 2,000 clocks this year, what is its operating leverage?

4. If it sells 2,000 clocks this year, what would be the percentage change in its operating income if it sells 5% more clocks next year?

5. What is the company’s contribution margin per unit?

6. What is the company’s contribution margin ratio?

7. How many units must the company sell to break even?

8. What amount of sales dollars is needed to break even?

9. How many units must the company sell to earn an operating income of $6,000?

10. What amount of sales dollars is needed to earn an operating income of $6,000?

11. If the company is currently selling 2,000 clocks, what is the margin of safety in units?

12. If the company is currently selling 2,000 clocks, what is the margin of safety in sales dollars?

13. If the company is currently selling 2,000 clocks, what is the margin of safety percentage?

Solutions

Expert Solution

Req 1:
Selling price: $20
Variable cost: $ 14
Contribution margin: Selling price - Variable cost = 20 -14 = $6
Sales units: 2000 units
Contnribution margin earned: 2000*6 = $ 12,000
Req 2: Fixed cost: $ 9000
Net income: Contribution-Fixed cost = 12000 -9000 = $3000
Req 3:
Operating lverage: Contribution/ Net income = 12000 /3000 = 4
Req 4:
Net sale sincrease: 5%
Net income increase by 20% (i.e. 5%*4)
Req 5:
Selling price: $20
Variable cost: $ 14
Contribution margin: Selling price - Variable cost = 20 -14 = $6
Req 6:
CM ratio: Contirbution margin per unit/ Selling pricec = 6 /20 = 30%
Req 7;
Break even unit: fixed cost / Contribution per unit = 9000 /6 = 1500 units
Req 8:
Break even in $: Fixed cost/ CM ratio = 9000 /30% = $ 30,000
Req 9:
Desired income: $ 6000
Desired contribution: 9000+6000 = $ 15000
Targete sales in units: Desired contribution/ CMm per unit = 15000/6= 2500 units
Req 10:
Target sales in $: Desired contribution/ CM ratio = 15000/30% = $50,000
Req11:
Margin of safety in units: total sales units-Break evn units = 2000 -1500 = 500 units
Req 12
Margin of safety: Net income / Cm ratio = 3000 /30% = $ 10,000
Req 13
% of margin of safety to total sales = 500/2000*100=25%

ekkarill92 answered 1 year ago
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