Question

Use the following Income Statement for Questions # 3 and # 4:

Burton Snowboard Co.

Contribution Income Statement

	Total	Per Unit	Percent
Sales (800 snowboards)	$200,000	$250	100%
Less variable expenses	120,000	150	60
Contribution margin	80,000	$100	40%
Less fixed expenses	80,000
Net operating income (loss)	$         0

3. Burton is considering an option (Plan A) to increase sales. What is the profit impact if Burton can increase unit sales from 800 to 1100 snowboards by using higher quality raw materials, thus increasing variable costs by $20 per snowboard? Show your answer by preparing an updated Income Statement below.

Burton Snowboard Co.

Plan A

Contribution Income Statement

	Total	Per Unit	Percent
Sales (1100 snowboards)
Less variable expenses
Contribution margin
Less fixed expenses
Net operating income (loss)

4. Refer back to the original income statement above (in black not blue). Burton is considering another option (Plan B) to increase sales.

a) What is the profit impact if Burton can increase unit sales from 800 to 1100 by increasing its advertising budget by $22,000 (fixed expense). (The variable cost remains at $150 / unit).

Show your answer by preparing an updated Income Statement below.

Burton Snowboard Co.

Plan B

Contribution Income Statement

	Total	Per Unit	Percent
Sales (1100 snowboards)
Less variable expenses
Contribution margin
Less fixed expenses
Net operating income (loss)

b) A company’s profits are more sensitive to changes in sales when it’s Operating Leverage is higher. Operating Leverage = Contribution Margin

                                  Net Income

   Under which option is Burton’s Operating Leverage Higher? Plan A or Plan B ?

Show your work.

c) If Burton is concerned that its sales may not reach the projected level of 1100 snowboards – which Plan should it implement ? Select one AND ALSO EXPLAIN WHY:

   Plan A or Plan B

  

   Why?

d) If Burton is confident that its can exceed the projected level of 1100 snowboards – which Plan should it implement? Select one AND ALSO EXPLAIN WHY:

   Plan A or Plan B

  

   Why?

Answer 1

Answer 3.

Answer 4-a.

Answer 4-b.

Plan A:

Operating Leverage = Contribution Margin / Net Income
Operating Leverage = $88,000 / $8,000
Operating Leverage = 11.00

Plan B:

Operating Leverage = Contribution Margin / Net Income
Operating Leverage = $110,000 / $8,000
Operating Leverage = 13.75

Plan B has higher Operating Leverage.

Answer 4-c.

Burton is concerned that its sales may not reach the projected level of 1,100 snowboards. So, Plan A should be selected

Plan with higher operating leverage have high risk. So, Plan B has high risk

Answer 4-d.

Burton is confident that its sales will exceed the projected level of 1,100 snowboards. So, Plan B should be selected

Plan with higher operating leverage have high risk and higher potential for reward. So, Plan B should be selected.