Deckyard Company distributes a lightweight lawn chair that sells for $57 per uni

Question

Deckyard Company distributes a lightweight lawn chair that sells for $57 per unit. Variable expenses are $28.50 per unit, and fixed expenses total $161,500 annually Required: 1. What is the product's CM ratio? CM ratio 2. Use the CM ratio to determine the break-even point in sales dollars. Break-even point in sales dollars 3. The company estimates that sales will increase by $63,000 during the coming year due to increased demand. By how much should net operating income increase? Net operating income increases by

Explanation / Answer

Answer of Part 1:

Contribution Margin per unit = Selling price – Variable Expenses per unit
Contribution Margin per unit = $57 - $28.50
Contribution Margin per unit = $28.50

Contribution Margin Ratio = Contribution Margin / Selling price *100
Contribution Margin Ratio = $28.50 / $57 *100
Contribution Margin Ratio = 50%

Answer of Part 2:

Break-Even Point in Sales dollars = Fixed Expenses / CM ratio
Break-Even Point in Sales Dollars = $161,500 / 0.50
Break-Even Point in Sales Dollars = $323,000

Answer of Part 3:

Expected Sales * CM ratio = Net Operating Income Increase by
$53,000 *50% = Net Operating Income Increase by
Net Operating Income Increase by = $26,500

Answer of Part 4 (a):

Degree of Operating Leverages = Contribution Margin / Net Operating Income
Degree of Operating Leverages = $969,000 / $807,500
Degree of Operating Leverages = 1.2

Answer of Part 4 (b):

Net Operating Income Increase by = Degree of Operating Leverages * Expected sales
Net Operating Income Increase by = 1.2 * 12%
Net Operating Income Increase by = 14.4%

Net Operating Income Increase in dollars by = 14.4% of $807,500
Net Operating Income Increase in Dollars by = $116,280

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