Required: 1. Compute the contribution margin per unit and calculate the break-ev

Question

Required:

1. Compute the contribution margin per unit and calculate the break-even point in units. Repeat using the contribution margin ratio.

2. The divisional manager has decided to increase the advertising budget by $100,000 and cut the selling price to $45. These actions will increase sales revenues by $1 million. Will the division be better off?

3. Refer to the original data. Suppose sales revenues exceed the estimated amount on the income statement by $540,000. Without preparing a new income statement, by how much are profits underestimated?

4. Refer to the original data. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. (Note: to change after-tax profit to before-tax profit, divide by 1-tax rate.)

5. Compute the safety margin based on the income statement given above. Calculate it as a dollar amount and as a percentage of sales.

6. Compute the operating leverage based on the income statement above. If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?

Explanation / Answer

1). contribution margin per unit= 4,440,000/148,000

=$ 30

break even point= point where net income is zero

thus x*50-20*x-3,200000=0

thus x= 106,666,667 units

2).in this case

net income will be= 148,000*45-20*148,000-100,000-3,200,000

=400,000+1,000,000

1,400,000

thus

this is morethan the previous one

thus this is a better off

3).income underestimated will be

540,000-216000

=324,000

4).total income should be

1.254/0.34 million

=3,688,235

thus let x unit be sold then

x*50-20*x-3,200000=3,688,235

thus x= 229,608 unit

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