Gulf Company has the following information for its first year inbusinss Sales pr
ID: 2510214 • Letter: G
Question
Gulf Company has the following information for its first year inbusinss Sales price per unit Variable cost per unit Total fixed costs Units sold $50 $30 $20,000 1,500 Requirements (4Points for 1. Compute the contribution margin per unit and the contribution margin ratio 2. Determine the break-even point in units and in dollars 3. Compute the margin of safety in dollars, and the margin of safety ratio income decrease if Determine the operating leverage factor, and by what percentage will the operating sales volume decreases by 8%? 4. How many units the company have to sell to earn an operating income of $6002 And how much will the sales revenue be? 5. If variable and fixed costs are both increased by 30% what will be the effect on the break-even point in units and dollars?Explanation / Answer
Answer 1
Contribution per unit = (Sales Price per unit - Variable cost per unit) = $50 - $30 = $20
Contribution Margin Ratio = Contribution per unit / Sales Price per unit = ($20 / $50 ) = 0.4 or 40 %
Answer 2
Break even points in units = Fixed cost / Contribution per unit = $20,000 / $20 = 1,000 units
Break even points in dollors = Fixed cost / Contribution margin ratio = $20,000 / 40 % = $50,000
Answer 3
Margin of safety in dollors = Actual Sales - Break even points in dollors
= (1,500 * $50) - $50,000 = $75,000 - $50,000 =$25,000
Margin of safety in ratio = Margin of safety in dollors / Actual Sales = ($25,000 / $75,000) =0.3333 or 33.33 %
Answer 4
Total contribution = (Unit Sold * Contribution per unit) = 1,500 units * $20 = $30,000
Net operating income = (Unit Sold * Contribution per unit) - Fixed Cost = $30,000 - $20,000 = $10,000
Operating leverage factor = Total contribution / Net operating income = $30,000 / $10,000 = 3
Note : Sales volume decrese by 8 % that also means total contribution also decrese by 8 %
New operating income = ($30,000 * 92 %) - $20,000 = $27,600 - $20,000 = $7,600
Percentage decrese in operating income
= ( Old operating income - New operating income) / Old operating income
= ($10,000 - $7,600) / $10,000 = 0.24 or 24%
Alternelively Percentage decrese in operating income = % Decrease in sales * Operating leverage factor
= 8 % * 3 = 24 %
Answer 5
Target operating income = $600
Target contribution = $600 + $20,000 = $20,600
Required Units = Target contribution / Contribution per unit = $20,600 / $20 = 1,030 units
Required sales revenue = Units * Selling Price per unit = 1,030 units * $50 = $51,500
Answer 6
New Variable cost = $30 * 130 % = $39
New Contribution per unit = $50 - $39 = $11
New Contribution margin = $11 / $50 = 0.22 or 22 %
New Fixed Cost = $20,000 * 130 % = $26,000
New Break even points in units = $26,000 / $11 =2,364 units
New Break even points in dollors = 2,364 units * $50 = $118,200
Thus , break even points in units increased by 1,364 units (2,364 units - 1,000 units) & break even points in dollors increased by $68,200 ($118,200 - $50,000)
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