Question

2. Change all of the numbers in the data area of your worksheet so that it looks like this:

	A	B	C	D
1	Chapter 3: Applying Excel
2
3	Data
4	Unit sales	30,000	units
5	Selling price per unit	$50	per unit
6	Variable expenses per unit	$20	per unit
7	Fixed expenses	$720,000
8

If your formulas are correct, you should get the correct answers to the following questions.

(a) What is the break-even in dollar sales?

(b) What is the margin of safety percentage?

(c) What is the degree of operating leverage? (Round your answer to 2 decimal places.)

3. Using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 20%.

4. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this:

	A	B	C	D
1	Chapter 3: Applying Excel
2
3	Data
4	Unit sales	36,000	units
5	Selling price per unit	$50	per unit
6	Variable expenses per unit	$20	per unit
7	Fixed expenses	$720,000
8

(a) What is net operating income? (Negative amount should be indicated by a minus sign.)

(b) By what percentage did the net operating income increase?

5. Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $17,000 and at that price, Thad estimates 600 units would be sold each year. The variable cost to produce and sell the cycles would be $12,750 per unit. The annual fixed cost would be $2,040,000.

a. What is the break-even in unit sales?

b. What is the margin of safety in dollars?

c. What is the degree of operating leverage? (Round your answer to 2 decimal places.)

Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $14,200 to compete effectively. In that event, Thad would also reduce fixed expenses to $1,551,000 by reducing advertising expenses, but he still hopes to sell 600 units per year.

d. What would the net operating income be in this situation? (Negative amount should be indicated by a minus sign.)

Answer 1

Rreq 2a:
Break even in $ = Total fixed cost / CM ratio
	( 720,000 /60%) = $1200,000
Contribution margin per unit = Selling price - variable cost = $ 50 - $ 30 = $ 20
CM ratio = Contribution margin per unit / Selling price =$ 30 / $ 50 *100 = 60%
Req B:
Total sales (30,000 units@50)			1,500,000
Less: Break even sales			1,200,000
Margin of Safety			300,000
Percecntage of Margin of Safety = 300,000 /1500,000 *100 = 20% of sales
Req C:
Contribution earned: 30,000 units @30: $900,000
Net operating icnome = Contribution - Fixed cost
		(900,000 -720,000 )= $180,000
Degree of Operating leverage = Contribution/Net Operating icnome
			(900,000 /180,000) = 5 times
Req 3:
If sales increases by 20%, Net operating icnome increased by 100% ( i.e. 5*20%)
Req 4:
Net Operating icnomee for Sales at 36,000 units:
Sales revenue (36,000 units@$50)				1,800,000
Less: Variable cost (36000 units @$20)				720,000
Contribution margin				1,080,000
Less: Fixed cost				720,000
Net operating income				360,000
Reqb: Increase in Net Oeprating icnome = $360,000 -180,000 = $180,000
Percentage increasse in net operating income = $180,000 /180,000 *100 = 100%
(i.e. Increase in income/ Original income earned)