5 (10 points). Eddie Barzoon Inc. produces a variety of products. One division m
ID: 2554591 • Letter: 5
Question
5 (10 points). Eddie Barzoon Inc. produces a variety of products. One division makes extremely realistic Halloween costumes. The division's projected income statement for the coming year is as follows: Sales (65,000 units) Less: Variable expenses $15,600,000 8,736,000 $6,864,000 4,012.000 $ 2,852,000 Less: Fixed expenses Operating income a. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using the contribution margin ratio. b. Eddie Barzoon has decided to increase the advertising budget by $140,000and cut the average seling price to $200. These actions will increase sales revenues by $1 million. Will this improve the division's financial situation? Prepare a new income statement to support your answer. c. Suppose sales revenues exceed the estimated amount on the income statement by $612,000. Without preparing a new income statement, determine by how much profits are underestimated. d. Compute the margin of safety in dollars based on the given income statement. e. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?Explanation / Answer
a. Contribution margin per unit = sales price per unit - variable cost per unit
= $240 - $(8736000 / 65000 units)
= $240 - $134.4
= $105.6
Break even units = Fixed cost / Contribution margin per unit
=$4012000 / $105.6
= 37992.42 units
Contribution margin ratio = Contribution margin / sales * 100
=$6864000 / $15600000
=44%
Break even in dollars = Fixed cost / Contribution margin ratio
= $4012000 / 0.44
= $9118182
Break even in units = Break even in dollars / selling price per unit
= $9118182 / $240
= 37992.42 units
b. Sales [(65000 * $200)+1000000] = 14000000
less: variable cost = 8736000
Contribution margin = 5264000
less: fixed cost [4012000+140000] =4152000
Operating income = $1112000
No, it will not improve the division's financial situation
d. margin of safety = actual sales - break even sales
= $15600000 - $9118182
= $6481818
e. Degree of operating leverage = $6864000 / $2852000
= 2.41
Degree of operating leverage = increase in operating income / 20% increase in sales
2.41 * 20% = increase in operating income
48.2% = increase in operating income
Percentage increase in profit by 48.2%
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