Question

Classwork on operating leverages and breakeven analysis for multiple products

Question 1

Penguin Co’s income statement in the contribution format for 2017 showed the following:

                                                    $

Revenue                              20,000
Variable costs                    10,000

Contribution margin        10,000
Fixed costs                           2,000

Operating income            8,000

Required

1.       Calculate the operating leverage.

2.       Using the operating leverage formula, calculate the new operating income if sales rise by 10%.

3.       Using the operating leverage formula, calculate the new operating income if sales fall by 15%.

Question 2

Peregrine Inc’s income statement in the contribution format for 2018 showed the following:

                                                    $

Revenue                              8,000
Variable costs                    2,000

Contribution margin        6,000
Fixed costs                          2,000

Operating income            4,000

Required

1)      Calculate the contribution margin percentage.

2)      Calculate the breakeven point in $ revenue.

3)      Calculate the operating leverage.

4)      Using the operating leverage formula, calculate the new operating income if sales rise by 50%.

5)      How much $ revenue is needed in order to generate a net income of $5,000 if the company is liable to 20% income tax?

Question 3

Wayne’s Workshop shows average revenue per customer of $400. Monthly fixed costs are $40,000. Variable costs in the last month were in total $32,000. During that month the workshop had 1,200 customers.

Required

1.       Calculate the contribution margin ratio.

2.       Calculate the breakeven point.

3.       What was the profit last month?

4.       Prepare an income statement for last month using the contribution format.

5.       What was the operating leverage?

6.       Using the operating leverage formula, calculate the new operating income if sales fall by 5%.

Question 4

Polkadot Co produce 3 types of soft toys: teddy bears, falcons, and snakes (TB, F, S). The following table shows for each product the expected sales volumes for 2019, sales prices (SP), variable costs per unit (VC), and company total budgeted fixed costs for 2019.

	TB	F	S	Total
Sales volume (units)	600	300	100	1000
SP ($)	20	30	15
VC ($)	10	12	7
Fixed costs ($)				2000

Required

1.       Calculate the sales mix for 2019.

2.       Calculate the contribution margin per unit for each product.

3.       Calculate the contribution margin per unit for the “average product”.

4.       Calculate the breakeven point in units of “average product”.

5.       How many units of each product need to be sold so that Polkadot Co breaks even?

Question 5

Moniker Bros. are budgeting to achieve half of their sales for 2020 with milk chocolate bars, a third with hazelnut chocolate bars, and the rest with bitter chocolate bars. Unit sales prices are as follows (variable costs in brackets): milk chocolate bars $4 ($3) , hazelnut chocolate bars $6 ($4), and the rest with bitter chocolate bars $8 ($5). Budgeted fixed costs for 2020 are $200,000.

How many bars of milk chocolate, hazelnut chocolate, and bitter chocolate does the company need to sell in 2020 to break even?

Answer 1

Question 1:

1.

Degree of operating leverage = Contribution Margin/Net operating Income

                                                        = $ 10,000/$ 8,000 = 1.25

2.

Increase in operating income = Increase in revenue % x degree of operating leverage

                                          = 10 % x 1.25 = 12.5 %

New operating income = $ 8,000 + $ 8,000 x 12.5 %

                                          = $ 8,000 + $ 8,000 x 0.125

                                          = $ 8,000 + $ 1,000 = $ 9,000

3.

Decrease in operating income = Decrease in revenue % x degree of operating leverage

                                          = 15 % x 1.25 = 19 %

New operating income = $ 8,000 - $ 8,000 x 19 %

                                          = $ 8,000 + $ 8,000 x 0.19

                                          = $ 8,000 - $ 1,500 = $ 6,500

Question 2:

1)

Contribution margin ratio = Contribution margin /sales x 100

                                               = $ 6,000/$ 8,000 x 100

                                               = 0.75 x 100 = 75 %

*******Answered first 4 sub parts.