Deckyard Company distributes a lightweight lawn chair that sells for $30 per uni
ID: 2409331 • Letter: D
Question
Deckyard Company distributes a lightweight lawn chair that sells for $30 per unit. Variable expenses are $12.00 per unit, and fixed expenses total $106,200 annually. Required: . What is the product's CM ratio? CM ratio 2. Use the CM ratio to determine the break-even point in sales dollars. Break-even point in sales dollars 3. The company estimates that sales will increase by $44,000 during the coming year due to increased demand. By how much should net operating income increase? Net operating income increases by 4. Assume that the operating results for last year were as follows $ 885,000 354,000 Variable expenses Contribution margin Fixed expenses 531,000 106,200 $ 424,800Explanation / Answer
1)
Calculation of CM Ratio
Sekking Price
(A)
$ 30.00
Less : Variable Cost
(B)
12
Contribution Margin
(C )
$ 18.00
Contribution Margin Ratio
(D=C/A)
60%
2)
Breakeven Analysis
Fixed Cost
(A)
$ 106,200.00
Contribution Margin Ratio
(B)
60%
Breakeven in Sales Dollars
(C=A/B)
$ 177,000.00
3)
Last year sales volume is taken as a base
Sales (885000+45000)
$ 930,000.00
Variable cost
$ 372,000.00
Contribution
$ 558,000.00
Fixed Cost
$ 106,200.00
Profit
$ 451,800.00
Net Income will Increase by
$ 27,000.00
4) a)
Degree of Operating Leverage
=
Contribution Margin/Net Operating income
Degree of Operating Leverage
=
531000/424800
Degree of Operating Leverage
=
1.25
4) b)
Sales Increase
18%
Degree of Operating Leverage
1.25
Increase in Operating Income
22.50%
5) a)
Last Year 40000 Units
Proposed 60000 Units
Total
Per Unit
Total
Per Unit
Sales
$ 1,092,000.00
$ 27.30
$ 1,638,000.00
$ 27.30
Variable cost
$ 480,000.00
$ 12.00
$ 720,000.00
$ 12.00
Contribution
$ 612,000.00
$ 15.30
$ 918,000.00
$ 15.30
Fixed Cost
$ 106,200.00
$ 2.66
$ 148,200.00
$ 2.47
Profit
$ 505,800.00
$ 12.65
$ 769,800.00
$ 12.83
Working 1
Units in previous year
40000
50% increase
20000
Sales next year
60000
Working 2
Sales price
$ 30.00
Decrease of 9%
$ 2.70
New Sales Price
$ 27.30
Working 3
Sales Value
Units
60000
Price
$ 27.30
$ 1,638,000.00
5) b)
Yes, I Recommended to accept manager's suggestion
6)
Alternative A
Alternative B
Incremental cost/revenue
Sales
1092000
1800000
$ 708,000.00
Variable Cost
$ 480,000.00
$ 828,000.00
$ (348,000.00)
Incremental revenue before commission
$ 360,000.00
Incremental Advertisement cost
72000
$ 288,000.00
Less: Advertisement expenses
$ 24,000.00
Incremental Net Profit
$ 264,000.00
1)
Calculation of CM Ratio
Sekking Price
(A)
$ 30.00
Less : Variable Cost
(B)
12
Contribution Margin
(C )
$ 18.00
Contribution Margin Ratio
(D=C/A)
60%
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