This was all that was given Ramada Company produces one golf cart model. A parti
ID: 2522013 • Letter: T
Question
This was all that was given
Ramada Company produces one golf cart model. A partially complete table of company costs follows:
Required:
1. Complete the table. (Round your "Cost per Unit" answers to 2 decimal places.)
2. Ramada sells its carts for $1,850 each. Prepare a contribution margin income statement for each of the three production levels given in the table.
4. Calculate Ramada’s break-even point in number of units and in sales revenue. (Round your final answers to the nearest whole number.)
5. Assume Ramada sold 200 carts last year. Without performing any calculations, determine whether Ramada earned a profit last year.
6. Calculate the number of carts that Ramada must sell to earn $85,500 profit.
7. Calculate Ramada’s degree of operating leverage if it sells 650 carts. (Round your answer to 4 decimal places. (i.e. .12345 should be entered as 12.345%.))
8. Using the degree of operating leverage, calculate the change in Ramada’s profit if sales are 20 percent less than expected. (Round your answer to 3 decimal places.)
Explanation / Answer
Ramada Company
Number of Golf Carts produced and sold
400 units
600 units
800 units
Total costs-
Variable costs
$296,000
$444,000
$592,000
Fixed cost per year
$192,000
$192,000
$192,000
Total costs
$488,000
$636,000
$784,000
Cost per unit:
Variable cost per unit
$740
$740
$740
Fixed cost per unit
$480
$320
$240
Total cost per unit
$1,220
$1,060
$980
Workings –
Ramada Company
Contribution margin income statement
Golf carts produced and sold
400 units
600 units
800 units
Sales revenue at $1,850 per unit
$740,000
$1,110,000
$1,480,000
Variable cost at $740 per unit
$296,000
$444,000
$592,000
Contribution margin
$444,000
$666,000
$888,000
Less: Fixed cost
$192,000
$192,000
$192,000
Net Operating Income
$252,000
$474,000
$696,000
Break-even point in units = fixed cost/contribution margin per unit
Contribution margin per unit = sales price – variable cost per unit
Sales price = $1,850
Variable cost per unit = $740
Contribution margin = 1,850 - $740 = $1,110
Fixed costper year = $192,000
Break-even point in units = $192,000/$1,110 = 173 units
Break-even point in sales dollars –
= fixed cost/contribution margin ratio
Contribution margin ratio = contribution margin/sales price per unit
= 1,110/1,850 = 60%
Fixed cost = $192,000
Break-even point in sales dollars = 192,000/60% = $320,000
Yes – Ramada earned a profit.
Since the break-even point in unit sales is 173, Ramada will earn profit on any unit sold beyond 173 carts level. Hence, at 200 carts (more than break-even point sales units) the company will earn a profit.
Desired sales units = (fixed cost + target profit)/contribution margin per unit
Fixed cost = $192,000
Target profit = $85,500
Contribution margin per unit = $1,110
Desired sales units = (192,000 + 85,500)1,110 = 250 units
Hence, the company must sell 250 carts to earn a target profit of $85,500.
Degree of operating leverage = contribution margin/net operating income
Contribution margin at 650 carts = $1,110 x 650 = $721,500
Less: Fixed cost = $192,000
Net operating income = $529,500
Degree of operating leverage = 721,500/529,500 = 1.3626
Change in profit = % change in sales x degree of operating leverage
= -20% x 1.3626 = 27.25%
Hence, profits will decrease by 27.25% when sales decrease by 20%.
Number of Golf Carts produced and sold
400 units
600 units
800 units
Total costs-
Variable costs
$296,000
$444,000
$592,000
Fixed cost per year
$192,000
$192,000
$192,000
Total costs
$488,000
$636,000
$784,000
Cost per unit:
Variable cost per unit
$740
$740
$740
Fixed cost per unit
$480
$320
$240
Total cost per unit
$1,220
$1,060
$980
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