Deckyard Company distributes a lightweight lawn chair that sells for $39 per uni

Question

Deckyard Company distributes a lightweight lawn chair that sells for $39 per unit. Variable expenses are $15.60 per unit, and fixed expenses total $145,800 annually.

What is the product's CM ratio?

Use the CM ratio to determine the break-even point in sales dollars.

The company estimates that sales will increase by $47,000 during the coming year due to increased demand. By how much should net operating income increase? (Omit the "$" sign in your response.)

580,320

Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

The president expects sales to increase by 12% next year. By how much should net operating income increase?

Refer to the original data. Assume that the company sold 41,500 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $43,500 increase in advertising expenditures, would increase annual unit sales by 50%.

Prepare two contribution format income statements, one showing the results of last years operations and one showing what the results of operations would be if these changes were made.(Input all amounts as positive values except losses which should be indicated by minus sign. Do not round intermediate calculations. Round proposed units to the nearest whole number. Round your "Per unit" answers to 2 decimal places.Omit the "$" sign in your response.)

Last Year
41,500 units

Proposed      
units

Refer to the original data. Assume again that the company sold 41,500 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $2.40 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

Deckyard Company distributes a lightweight lawn chair that sells for $39 per unit. Variable expenses are $15.60 per unit, and fixed expenses total $145,800 annually.

Explanation / Answer

1) Contribution = Sales - Variable costs = $39 - $15.60 = $23.40.

CM Ratio = (Contribution / Sales) x 100 = ($23.40 / $39) x 100 = 60%.

2) Breakeven point = Fixed Costs / CM ratio = $145,800 / 60% = $243,000

3) Net operating income will increase by the contribution generated from the additional sales

= $47,000 x 60% = $28,200

So, Operating income will increase by $28,200.

4)

a) Degree of operating leverage = Contribution margin / Net operating Income

= 725,400 / 580,320 = 1.25 times.

b) If sales increases by 12%, the net operating income will increase by 12 x 1.25 times = 15%.

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