Question

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	$	60,000
Variable expenses		39,000
Contribution margin		21,000
Fixed expenses		14,700
Net operating income	$	6,300

contribution margin per unit = $21

contribution margin ratio = 35%

variable expense ratio = 65%

If sales increase to 1,001 units, what would be the increase in net operating income? == $21

5) If sales decline to 900 units, what would be the net operating income?

6) If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income?

7) If the variable cost per unit increases by $1, spending on advertising increases by $1,500, and unit sales increase by 200 units, what would be the net operating income?

8) What is the break-even point in unit sales?

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

10) How many units must be sold to achieve a target profit of $12,600?

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

12) What is the degree of operating leverage?

13) Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

14) Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $14,700 and the total fixed expenses are $39,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

15)Assume that the amounts of the company’s total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $14,700 and the total fixed expenses are $39,000. Given this scenario and assuming that total sales remain the same. Using the degree of calculated operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales?

Answer 1

Solution 4:

If sales increase to 1,001 units, increase in net operating income = Increase in sales units * Contribution margin per unit

= 1 * $21 = $21

Solution 5:

If sales decline to 900 units, net operating income = Contribution margin - Fixed costs

= (900*$21) - $14,700 = $4,200

Solution 6:

If the selling price increases by $2 per unit then new contribution margin per unit = $21 + $2 = $23

If sales volume decreases by 100 units, new sales volume = 1000 -100 = 900 units

Net operating income = (900*$23) - $14,700 = $6,000

Solution 7:

If variable cost per unit increases by $1, then new contribution margin per unit = $21 - $1 = $20

New fixed costs = $14,700 + $1,500 = $16,200

New sales volume = 1000+200 = 1200

Net Operating Income = (1200*$20) - $16,200 = $7,800

Solution 8:

Break even point in unit sales = Fixed cost / contribution margin per unit = $14,700 / $21 = 700 units

Solution 9:

Breakeven point in dollar sales = Breakeven point in unit sales * selling price per unit = 700 * $60 = $42,000