Tyrene Products manufactures recreational equipment. One of the company\'s produ

Question

Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $30. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $18.00 per skateboard of which 60% is direct labor cost. Over the past year the company sold 51.000 skateboards, with the following operating results: Management is anxious to maintain and perhaps even improve its present level of income from the skateboards. Required: Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number. Omit the "%" sign in your response.) Compute the degree of operating leverage at last year's level of sales. (Round your answer to 2 decimal places.) Due to an increase in labor rates, the company estimates that variable costs will increase by $2.40 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $30.00, what will be the new CM ratio and the new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number. Omit the "%" sign in your response.) Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 80%. If the new plant is built, what would be the company's new CM ratio and new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number. Omit the sign in your response.) Refer to the data in (5) above. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Assume that the new plant is constructed and that next year the company manufactures and sells 51.000 skateboards (the same number as sold last year). Prepare a contribution format income statement. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Explanation / Answer

1a. CM margin = contribution margin/sales = 612,000/1,530,000 = 40%

break even unit sales = fixed costs/contribution margin per product = 492,000/(30-18) = 492,000/12 = 41,000 units.

b. degree of operating leverage = contribution margin percentage/operating income percentage

contribution margin % = 40%. operating income percentage = operating income/sales = 120,000/1,530,000 = 7.84%.

Thus, degree of operating leverage = 40%/7.84% = 5.10

2. new variable costs = old variable costs+increase = 18+2.4 = $20.4

Contribution margin = sales - total variable costs = 1,530,000 - 51,000*20.4 = $489,600

CM ratio = 489,600/1530000 = 32%

Break even = 492,000/(30-20.4) = 51,250 units.

3. let the number of skateborads sold be x. sales = sale price per unit*no. of skateboards = 30x. variable costs = variable cost per unit*no. of skateboards = 20.4x.

operating income = sales - variable costs - fixed costs = 30x - 20.4x - 492,000 = 9.6x - 492,000

Now, 9.6x - 492,000 = 120,000 or 9.6x = 612,000 or x = 63,750 units.

4. CM ratio of last year = 40%. let the new selling price be "y" per skateboard. Total sales = 51,000y

Total variable costs = 51,000*20.4 = 1,040,400. contribution margin = sales - variable costs = 51,000y - 1,040,400

CM ratio = CM/sales = 51,000y - 1,040,400/51,000y

Now, 51,000y - 1,040,400/51,000y = 0.4

or, 51,000y - 1,040,400 = 20,400y

or, 30600y = 1040000

or y = $34

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