Dana\'s Ribbon World makes award rosettes. Following is information about the co

Question

Dana's Ribbon World makes award rosettes. Following is information about the company Variable cost per rosette Sales price per rosette Total fixed costs per month $ 2.20 5.00 1400.00 Required: . Suppose Dana's would like to generate a profit of $1,040. Determine how many rosettes it must sell to achieve this target profit. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.) arget Units 2. If Dana's sells 1,540 rosettes, compute its margin of safety in units, in sales dollars, and as a percentage of sales. (Round your Margin of Safety percentage to two decimal places (Le.-1234 should be entered as 12.34%). Margin of Safety (Units) Rosettes Margin of Safety in Dolars Percentage of Sales 3. Calculate Dana's degree of operating leverage if it sells 1,540 rosettes. (Round your intermediate calculations to 2 decimal places and final answer to 4 decimal places.) of

Explanation / Answer

Req 1 Selling price: $ 5 Variable cost: $ 2.20 Contribution margin: 5 -2.20 = $2.80 per unit Fixed cost: $ 1400 Desired income: $ 1040 Desired contribution: Fixed cost+ Desirec income= 1400+1040 = $ 2440 Target Sales units: Desired contribution/ Contribution margin per unit ($ 2440/2.80) = 871.43 or 872 units target Units 872 units Req 2: CM ratio: Contribution/ Selling price *100 =2.80 /5 *100 =56% Sales units: 1540 units Total contribution: 1540 units @$2.80= $4312 Net Income: Contribution-Fixed cost = 4312 -1400 = 2912 Margin of safety: Net income / CM per unit = 2912/2.80 =1040 units Margin of Safety in $ : Net Income/ CM ratio = $2912/56% = $5200 Margin of safety as % of sales: 1040/1540*100= 67.53% Margin of safety in units 1040 units margin of safety in $ $5,200 % of sales 67.53% Req 3: Total contribution at 1540 units: 4312 Net Income at 1540 units: 2912 Degree of operating leverage: Total contribution/ Net income (4312 /2912 )= 1.48 Req 4. Sales drops to 1155 units % decrease in sales: ( 1540-1155) /1540 *100 ( 385 / 1540) *100 = 25% As degree of operating leverage is 1.48, % decrease in Net income is 37% Effect on profit -37% CONTRIBUTION MARGIN INCMOE STATEMENT Revenue (1155 units @5) 5775 less: variable cost(1155 units @2.20) 2541 Contribution 3234 less: Fixed cost 1400 Net income 1834

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