(SHOW YOUR WORK) 1. The following is Arkadia Corporation\'s contribution format
ID: 2527008 • Letter: #
Question
(SHOW YOUR WORK)
1. The following is Arkadia Corporation's contribution format income statement for last month:
Sales
$1,200,000
Variable expenses
800,000
Contribution margin
400,000
Fixed expenses
300,000
Net operating income
$100,000
The company has no beginning or ending inventories and produced and sold 20,000 units during the month.
Required:
a. What is the company's contribution margin ratio?
b. What is the company's break-even in units?
c. If sales increase by 100 units, by how much should net operating income increase?
d. How many units would the company have to sell to attain a target profit of $125,000?
e. What is the company's margin of safety in dollars?
f. What is the company's degree of operating leverage?
2. Data concerning Sumter Corporation's single product appear below:
Per Unit
Percent of Sales
Selling price
$220
100%
Variable expenses
66
30%
Contribution margin
$154
70%
Fixed expenses are $1,024,000 per month. The company is currently selling 8,000 units per month.
Required:
a. Compute the break even amount in units.
b. Management is considering using a new component that would increase the unit variable cost by $6. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 300 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected?
Sales
$1,200,000
Variable expenses
800,000
Contribution margin
400,000
Fixed expenses
300,000
Net operating income
$100,000
Explanation / Answer
1) Contribution margin ratio = 400000*100/1200000 = 33.33%
2) Contribution margin per unit = 400000/20000 = 20 per unit
Break even point unit = 300000/20 = 15000 unit
3) If sale increase by 100 units then net operating income increase by (100*20) = 2000
4) Required unit = (300000+125000)/20 = 21250 units
5) Margin of safety in dollar = 1200000-(15000*60) = 300000
6) Degree of operating leverage = Contribution margin/operating income = 400000/100000 = 4
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