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 $36. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totaling $25.20 per skateboard, of which 70% is direct labour cost. Over the past year the company sold 52,000 skateboards, with the following operating results Sales (52,000 skateboards) Variable expenses $1,872,000 1,310,400 Contribution margin Fixed expenses 561,600 453,600 Net operating income $ 108,000 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 year's level of sales. (Round your answer to 2 decimal places.) Degree of operating leverage

Explanation / Answer

Req 1-A: Selling price: $ 36 per unit Varriable cost per unit: $ 25.20 per unit Contribution margin per unit: 36.00 - 25.20 = 10.80 per unit CM ratio : CM per unit / Selling price *100 = 10.8/36*100 = 30% Break even in units: Total fixed expense/ CM per unit = $ 453,600 /10.80 = 42,000 units Req 1-b: DOL = Contribution/ Net income = $ 561600/108,000 = 5.20times Req 2: Revised Variable cost per unit: 25.20+1.80= $ 27 per unit CM perunit : 36.00 -27.00 = 9.00 per unit CM ratio: 9/36 *100 = 25% Break even in units: Fixed cost / CM per unit = 453600 /9 = 50,400 units Req 3: Desired contribution: $ 561,600 CM per unit: $ 9.00 per unit Sales Target: Desired contribution/ Contribution per unit ($ 561,600 / 9.00 ) = 62,400 units Req 4: Original CM ratio: 30% Variable cosst ratio: 70% Now, Revised Variable cost per unit: $ 27.00 per unnit VC ratio to remain same: 70% Therefore, Revised selling price: 27 /70% = $38.57 per unit Req 5: Revised Variable ccost: 25.20 -20% = $ 20.16 per unit Revised Fixed cost: $ 453,600+70% = $771,120 Revised CM per unit: 36.00 - 20.16= $15.84 per unit Revised Break even units: $771,120 /14.40 = 48,682 units Req 6: Desired profits: $ 108,000 Fixed cost: 771,120 Desired contribution: 108000+771,120 = 879,120 Target sales in units: 879,120 /15.84 = 55,500 units Req 6-b: Income Statement: Sales revenue (52000*36) 1872000 Less: variable ccost (52000*20.16) 1048320 Contribution 823680 Less: Fix ed cost 771,120 Net operating income 52,560 Req 6-b2 DOL: Contribution / Net income (823,680 /52560) = 15.67

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