Oslo Company prepared the following contribution format income statement based o

Question

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Sales

$22,700

Variable Expenses

12,900

Contribution Margin

9,800

Fixed Expenses

8,232

Net Operating Income

$1,568

Answer the following:

If sales decline to 900 units, what would be the net operating income? (Do not round intermediate calculations.)

If the selling price increases by $1.60 per unit and the sales volume decreases by 100 units, what would be the net operating income? (Do not round intermediate calculations.)

If the variable cost per unit increases by $.60, spending on advertising increases by $1,100, and unit sales increase by 250 units, what would be the net operating income? (Do not round intermediate calculations.)

What is the break-even point in unit sales? (Do not round intermediate calculations.)

What is the break-even point in dollar sales? (Round intermediate calculations to 4 decimal places. Round your final answer to the nearest dollar amount.)

How many units must be sold to achieve a target profit of $5,684? (Do not round intermediate calculations.)

What is the margin of safety in dollars? (Do not round intermediate calculations.)

What is the margin of safety percentage? (Round your final answers to the nearest whole percentage (i.e, .12 should be entered as 12).)

What is the degree of operating leverage? (Round your answer to 2 decimal places.)

Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $8,232 and the total fixed expenses are $12,900. Given this scenario, and assuming that total sales remain the same, calculate the degree of operating leverage. Using the calculated degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

Sales

$22,700

Variable Expenses

12,900

Contribution Margin

9,800

Fixed Expenses

8,232

Net Operating Income

$1,568

Explanation / Answer

1)

Contribution per unit = $9800 / 1000 = $9.8 per unit

If sales decline to 900 units,

Contribution declines to 900 x $9.8 = $8820 units.

So Net income operating income = $8820 - $8232 (fixed expense) = $588

2)

Selling price per unit beofre any increase = $22700 / 1000 = $22.70 per unit

Current variable cost per unit = $12900 /1000 = $12.90

Increased selling price = $22.70 + $1.60 = $ 24.30 per unit

Reduced sales volume = 900 units

Revised contribution per unit = selling perice per unit - variable expenses per unit = $24.30 - $12.90 = $ 11.40

Net operating profit = Total contribution - fixed cost = $11.40/unit x 900 units - $8232 =$2028

3)

Revised variable cost per unit = $12.90 + $0.60 = $13.50

Selling price per unit = $22.70

Revised fixed cost = Advertisement cost + current fixed cost = $1100 + $8232 = $9332

Revised contribution per unit = $22.70 - $13.50 = $9.20

Revised sales volume = 1000 + 250 = 1250 units

Net operating profit = Total contribution - fixed cost = $9.20 / unit x 1250 units - $9332 = $2168

4)

Break even point in unit sales = Fixed cost / contribution per unit = $8232 / $9.8 per unit = 840 units

Breal even point in sales = 840 units x $22.70 per unit = $19068

5)

Target profit = $5684

Number of units to be sold

= (fixed cost + target profit) / Contribution per unit

= ($8232 + $5684) / $9.80 per unit

= 1420 units

6)

Margin of safety in dollars = sales - BEP sales = $22700 - $19068 = $3632

Margin of safety in percentage = $3632 / $22700 = 0.16 = 16%

7)

DOL = contribution margin / operating income = $9800 / $1568 = 6.25

Therefore,

Change in operating income / change in sales = 6.25

If there is a 5% increase in sales,

Change in net operating income = 6.25 x change in sales = 6.25 x 5% = 6.25 x .05 = 0.3125 = 31.25 %

So if there is an increase of 5% in sales the net operating incomewill be increased by 31.25%

8)

The contribution margin will be changed to $22700 - $8232 = $14468

The net operating income = $14468 - $12900 = $1568

DOL = $14468 / $1568 = 9.23

Estimated increase in the net operating income for a 5% increase in sales = 9.23 x 0.05 = 46.15%

so net income will increase by 46.15%

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