John sells Atoms, which are super-fast exoskeleton cars. John sells three differ
ID: 2424052 • Letter: J
Question
John sells Atoms, which are super-fast exoskeleton cars. John sells three different versions of the Atom, a regular version, a really fast version, and a racetrack version. Last year’s sales and cost data for the Atoms are as follows:
Regular
Really Fast
RaceTrack
Selling price
$65,000
$90,000
$54,000
Units sold
200
150
25
Manufacturing cost per unit
30,000
40,000
25,000
Total selling expense
800,000
2,000,000
300,000
Total administrative expense
700,000
650,000
525,000
Additional information indicates $1.5 million of administrative expenses were allocated to the three branches equally ($500,000 each), with the remaining administrative expenses being variable. The selling expenses each contain $200,000 of fixed selling expenses, with the remainder being variable.
What was the total profit for Johns Atoms?
Assuming the product mix is constant, how many of each type of Atom must be sold in order for John to break even?
What is Johns overall contribution margin ratio?
What is the company’s degree of operating leverage (assume profit from a) is net operating income)?
Approximately how much would sales have to increase in order for net operating income to increase $1,025,000?
Regular
Really Fast
RaceTrack
Selling price
$65,000
$90,000
$54,000
Units sold
200
150
25
Manufacturing cost per unit
30,000
40,000
25,000
Total selling expense
800,000
2,000,000
300,000
Total administrative expense
700,000
650,000
525,000
Explanation / Answer
(a) Computaion of Total Profit
Amount in $
Particulars Regular Really Fast RaceTrack Total
Selling price 65,000 90,000 54,000 209,000
Units sold 200 150 25
Sale Value 13,000,000 13,500,000 1,350,000 27,850,000
Manufacturing cost 6,000,000 6,000,000 625,000 12,625,000
Selling Expenses:
Fixed 200,000 200,000 200,000 600,000
Variable 600,000 1,800,000 100,000 2,500,000
Administrative Expenses:
Fixed 500,000 500,000 500,000 1,500,000
Variable 200,000 150,000 25,000 375,000
Total Cost of Goods Sold 7,500,000 8,650,000 1,450,000 17,600,000
Total Profit 5,500,000 4,850,000 (100,000) 10,250,000
Working Note:
Computaion of Variable Exp per unit
Total Selling Exp 800,000 2,000,000 300,000
Less: Fixed Selling Exp 200,000 200,000 200,000
Variable Exp 600,000 1,800,000 100,000
Variable Exp per unit 3,000 12,000 4,000
Total Administrative Exp 700,000 650,000 525,000
Less: Fixed Administrative Exp 500,000 500,000 500,000
Variable Exp 200,000 150,000 25,000
Variable Exp per unit 1,000 1,000 1,000
(b) Break Even for Each type of car Fixed Cost/Contribution
Contribution = (Sale Price- Variable Cost)
Particulars Regular Really Fast RaceTrack
Sale Price Per Unit 65,000 90,000 54,000
Variable Cost Per Unit 34,000 53,000 30,000
Contribution per unit 31,000 37,000 24,000
Fixed Cost 700,000 700,000 700,000
Break Even per car 23 19 29
(C ) overall contribution margin ratio
Total Sale Value 27,850,000
Total Variable Cost 15,500,000
Total Contribution 12,350,000
% 44.34
(d) Degree of Operating Leverage % Change in EBIT/% Change in Sales
Let assume sale will increase by 5 %
Revised Contribution
Total Sale Value 29,242,500
Total Variable Cost 16,275,000
Total Fixed Cost 2,100,000
EBIT 10,867,500
% EBIT 37.16
Original EBIT As per (a) 36.80
DOOL 0.071813285
(e) sales to increase in order for net operating income to increase $1,025,000
Existing Net Operating Income 10,250,000
Increase 1,025,000
Total 11,275,000
Sale to increase profit 2,311,437
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