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 38. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totalling $25.20 per skateboard, of which 70% is direct labour cost. Over the past year the company sold 55,000 skateboards, with the following operating results 1,980,000 Sales (55,000 skateboards) Variable expenses Contribution margin 1,388,000 594,000 540,000 Fixed expenses Net operating income 5 54,000 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards Required: 1a. Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Contribution margin Unit sales to break-even point skateboards 1b. Compute the degree of operating leverage at last years level of sales. (Round your answer to 2 decimal places.) 2. Due to an increase in labor rates, the company estimates that variable costs will increase by $2.18 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $38.00, 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.) Contribution margin Unit sales to break-even point 3. 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, $54,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) 4. 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. )

Explanation / Answer

Solution:

Part - 1a

Contribution Margin = Contribution Margin 594,000 / Sales 1980,000 x 100 = 30%

Unit Sales to break even point =Total Fixed Cost /Contribution Margin Per Unit

Contribution margin per unit = 594,000 / 55,000 units = $10.80 per unit

Unit Sales to break even point =Total Fixed Cost 540,000 /Contribution Margin Per Unit 10.80 = 50,000 Skateboards

Part 1b –

Degree of Operating Leverage = Contribution Margin / Operating Income = 594,000 / 54,000 = 11

Part 2a –

Unit New Variable Cost = $25.20 Old + Increase 2.16 = $27.36

Contribution Margin Per Unit = Unit Selling Price 36 – New Unit Variable Cost 27.36 = 8.64

Contribution margin ratio = 8.64 / 36 x 100 = 24%

Unit Sales to break even point =Total Fixed Cost 540,000 /Contribution Margin Per Unit 8.64 = 62,500 Skateboards

Part 3

Number of Skateboards to be sold to earn $54,000 net income = (Fixed Cost +Target Income) / Contribution Margin Per Unit

= (540,000 + 54,000) / 8.64

= 68,750 Skateboards

Part 4—

Old CM Ratio = 30%

New Variable Cost per unit = $27.36

Old CM Ratio is 30% it means variable cost ratio is 70% of sales.

New Variable Cost per unit = Unit Selling Price x 70%

$27.36 = Unit Selling Price x 70%

Unit Selling Price = 27.36 / 70% = $39.09

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts.

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