Question

A	B	C	D
1	Chapter 5: Applying Excel
2
3	Data
4	Unit sales	30,000	units
5	Selling price per unit	$70	per unit
6	Variable expenses per unit	$42	per unit
7	Fixed expenses	$420,000
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 5: Applying Excel 2 3 Data 4 Unit sales 36,000 units 5 Selling price per unit $70 per unit 6 Variable expenses per unit $42 per unit 7 Fixed expenses $420,000 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 400 units would be sold each year. The variable cost to produce and sell the cycles would be $13,600 per unit. The annual fixed cost would be $1,224,000.

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 $1,139,000 by reducing advertising expenses, but he still hopes to sell 400 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

	Per Unit	Total
Sales (36000*70)	70	$        2,520,000
Variable Expenses	42	$        1,512,000
Contribution	28	$        1,008,000
Fixes Cost		$            420,000
Net Operating Income		$            588,000
Contribution Margin (28/70)		40%

a
Break Even Dollars	=	Fixed cost	/	Contribution margin
Break Even Dollars	=	$                           420,000	/	40%
Break Even Dollars	=	$                       1,050,000

b
Margin of Saftey	=	Current Sales - BreakEven Sales	/	Current Sales
Margin of Saftey	=	2520000-1050000	/	$                        2,520,000
Margin of Saftey	=	$                       1,470,000	/	$                        2,520,000
Margin of Saftey	=	58.33%

c
Degree of Operating Leverage	=	Contribution	/	Net Operating Income
Degree of Operating Leverage	=	$                       1,008,000	/	$                            588,000
Degree of Operating Leverage	=	1.71

3
% Change in Operating Income	=	20%*1.71
% Change in Operating Income	=	34.20%

4.

	Per Unit	Total
Sales (17000*400)	$                 17,000	$        6,800,000
Variable Expenses	$                 13,600	$        5,440,000
Contribution	$                   3,400	$        1,360,000
Fixes Cost		$        1,224,000
Net Operating Income		$            136,000
Contribution Margin % (3400/17000)		20%

a
Net Operating income	=	$                           789,600

b
% Change in Operating Income	=	789600-588000	/	$                            588,000
% Change in Operating Income	=	$                           201,600	/	$                            588,000
% Change in Operating Income	=	32.20%

5.

	Per Unit	Total
Sales (17000*400)	$                 17,000	$        6,800,000
Variable Expenses	$                 13,600	$        5,440,000
Contribution	$                   3,400	$        1,360,000
Fixes Cost		$        1,224,000
Net Operating Income		$            136,000
Contribution Margin % (3400/17000)		20%

a
Break Even Dollars	=	Fixed cost	/	Contribution margin %
Break Even Dollars	=	$                       1,224,000	/	20%
Break Even Dollars	=	$                       6,120,000

b
Margin of Saftey	=	Current Sales - BreakEven Sales	/	Current Sales
Margin of Saftey	=	6800000-6120000	/	$                        6,800,000
Margin of Saftey	=	$                           680,000	/	$                        6,800,000
Margin of Saftey	=	10.00%

c
Degree of Operating Leverage	=	Contribution	/	Net Operating Income
Degree of Operating Leverage	=	$                       1,360,000	/	$                            136,000
Degree of Operating Leverage	=	10.00

d.

	Per Unit	Total
Sales (17000*400)	$                 14,200	$        5,680,000
Variable Expenses	$                 13,600	$        5,440,000
Contribution	$                       600	$            240,000
Fixes Cost		$        1,139,000
Net Operating Income		$         (899,000)

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