1) Given the following: Sales = $100,000, COGS = $60,000, SGA Expenses = $20,000

Question

1) Given the following: Sales = $100,000, COGS = $60,000, SGA Expenses = $20,000, variable expense = $50,000, Fixed expense = $30,000. What is the net income? What is the breakeven point? What is the operating leverage ratio? If sales increase by 10%, what will the resulting net income be? (operating leverage = CM/NI), breakeven point = (FE/CMR)

2)Give the journal entries for the following situations:
a)Ten t-shirts were sold for cash at $10 each.
b)Ten t-shirts were sold for $10 each; the customer will pay tomorrow.
c)The customer puts $200 down for some t-shirts that they will pick up tomorrow.

Explanation / Answer

1. Sales $100,000 Variable expense ($50,000) Contribution margin $50,000 Fixed expense ($30,000) Net income $20,000 Net income = $20,000 Breakeven point = Fixed expense /Contribution margin ratio Contribution margin ratio = Contribution margin / Sales = 50,000 / 100,000 = 0.5 Breakeven point = $30,000 / 0.5 = $60,000 sales dollars Operating leverage = Contribution margin /Net income = 50,000 / 20,000 = 2.5 i.e. the percentage change in Operating Income for a given percentage change in Sales For 10% increase in sales, net income increases by 2.5 x 10% = 25% Resulting net income = $20,000 x 125% = $25,000 2. a. Dr Cash $100 Cr Sales revenue $100 b. Dr Accounts receivable $100 Cr Sales revenue $100 c. Dr Cash $200 Cr Unearned revenue $200

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