5. Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of r

Question

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 $11,000 and at that price, Thad estimates 600 units would be sold each year. The variable cost to produce and sell the cycles would be $8,250 per unit. The annual fixed cost would be $1,237,500.

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 $8,500 to compete effectively. In that event, Thad would also reduce fixed expenses to $990,500 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.)

Explanation / Answer

a) BEP(units) fixed cost/contribution margin per unit 1,237,500/(11000-8250) 450 units b) Margin of safety actual sales - BEP sales (600 - 450)*11000 1650000 c) Degree of operating leverage contribution/net income (2750*600)/(2750-600-1,237,500) 1,650,000/412,500 4 d) net operating income contribution margin (8,500-8,250)*600= 150000 less fixed expense 990,500 net operating loss -840,500

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.