iPad 7:27 PM 69% . jump to po book contents search ebook 90 Oslo Company prepare
ID: 2548161 • Letter: I
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iPad 7:27 PM 69% . jump to po book contents search ebook 90 Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales. Variable expenses Contribution margin Fixed expenses. Net operating Income $20,000 12,000 8,000 6,000 2,000 Required (Answer each question independently and always refer to the original data unless instructed otherwise. 1. What is the contribution margin per unit? 2. What is the contribution margin ratio? 3. What is the variable expense ratio? 4. If sales increase to 1,001 units, what would be the increase in net operating income? 5. If sales decline to 900 units, what would be the net operating income? 6. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income? 7, If the variable cost per unit increases by $1, spending on advertising increases by $1,500, and unit sales increase by 250 units, what would be the net operating income? 8. What is the break-even point in unit sales? 9. What is the break-even point in dollar sales? 10. How many units must be sold to achieve a target profit of $5,000? 11. What is the margin of safety in dollars? What is the margin of safety percentage? 12. What is the degree of operating leverage? 13. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? 14. Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $6,000 and the total fixed expenses are $12,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage? 15. Using the degree of operating leverage that you computed in the previous question, what is the estimated percent increase in net operating income of a 5% increase in sales?Explanation / Answer
Requirement 1 Contribution Margin Per Unit = Contribution / Sales units = 8000/1000 Contribution Margin Per Unit = $8 Unit Sales 1000 units Selling price per unit $ 20 per unit Variable expenses per unit $ 12 per unit Fixed expenses $ 6,000 Requirement 2 & 3 Compute the CM ratio and variable expenses ratio Selling price per unit $ 20 per unit Variable expenses per unit $ 12 per unit Contribution Margin per unit $ 8 per unit CM ratio Contribution margin/Sales *100 Varible expense ratio Variable expense/Sales *100 CM ratio (8/20 X100) 40% Varible expense ratio (12/20X100) 60% Requirement 4 Increase in Net income (1unit X $ 8) $8 There is no change in Fixed expenses Requirement 5 Net operating income if sales is 900 units Sales (900 X20) 18,000 Variable Expenses (900 X 12) 10,800 Contribution Margin (900 X8) 7,200 Fixed Expenses 6,000 Net Operating Income 1,200 Requirement 6 Net operating income if sales is 900 units & Selling price per unit increases by $2 Sales (900 X22) 19,800 Variable Expenses (900 X 12) 10,800 Contribution Margin (900 X8) 9,000 Fixed Expenses 6,000 Net Operating Income 3,000 Requirement 7 Net operating income if sales is 1250 units &Variable cost per unit increases by $1 and advertisement Increases by $1500 Sales (1250 X20) 25,000 Variable Expenses (1250 X 13) 16,250 Contribution Margin (1250 X7) 8,750 Fixed Expenses (6000+1500) 7,500 Net Operating Income 1,250 Requirement 8 & 9 Compute the break even point Break even in unit sales Fixed expenses/ contribution per unit Break even in dollar sales Break even units X selling price per unit Break even in unit sales ($6000/$8) 750 Units Break even in dollar sales (750 X 20) 15000 Requirement 10 Units to be sold to achieve target profit of $5000 Required Contribution = Target profit + Fixed Expense =5,000+6,000 =11,000 Units to be Sold = 11,000/$8 =1,375 units Requirement 11 Computation of margin of safety margin of safety in dollar Actual sales - Break even sales margin of safety percentage (Actual sales - Break even sales)/ Actual Sales *100 margin of safety in dollar (20000-15000) 5000 margin of safety percentage(5000/20000 X100) 25% Requirement 12 Compute the degree of operating leverage Sales 20000 Varaible expenses 12000 Contribution margin 8000 Fixed Expenses $ 6,000 Net operating income $ 2,000 Degree of Operating leverage Contribution margin/Net operating Income Degree of Operating leverage (8000/2000) 4.00 Requirement 13 Increase in Net operating income (4 X 5 %) 20% Requirement 14 Sales 20000 Varaible expenses 6000 Contribution margin 14000 Fixed Expenses $ 12,000 Net operating income $ 2,000 Degree of Operating leverage Contribution margin/Net operating Income Degree of Operating leverage (14000/2000) 7.00 Requirement 15 Increase in Net operating income (7 X 5 %) 35%
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