of 3 5 (10 points). Eddie Barzoon Inc. produces a variety of products. One divis
ID: 2555058 • Letter: O
Question
of 3 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 Contribution margin Less: Fixed expenses Operating income $15,600,000 8,736,000 $ 6,864,000 4,012,000 $ 2,852,000 a. Compute the contribution margin per unit, and calculate the break-even paint in units. Repeat, using the contribution margin ratio b. Eddie Barzoon has decided to increase the advertising budget by $140,000 and cut the average selling 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. t by $612,000. Withaut c. Suppose sales revenues exceed the estimated amount on the income statemen preparing a new income statement, determine by how much profits are underestimated. d. Compute the margin of safety in dollars based on the given income statement e. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits? 0Explanation / Answer
Answer
Units
per Unit ($)
Amount ($)
Sales
65000
240
15600000
(-) Variable cost
65000
134.4
8736000
Contribution margin
65000
105.6
6864000
(-) Fixed Expenses
4012000
Operating Income
$2852000
A
Total Contribution margin
$6864000
B
Total Units sold
65000
C=A/B
Contribution margin per unit
$105.6
D
Fixed Cost
4012000
E=D/C
Break Even point in Units
37992
A
Total Contribution margin
$6864000
B
Total Sales Revenue
$15600000
C=A/B
Contribution margin ratio
44%
D
Fixed Cost
$4012000
E=D/C
Break Even in Sales Dollars
$9118182
This will not improve financial position. Contribution margin will become less if sales price is decreased.
New Sales Revenue will be $15600000 + $1 million = $16600000
Units
per Unit ($)
Amount ($)
Sales
83000
200
16600000
(-) Variable cost
83000
134.4
11155200
Contribution margin
83000
65.6
$5444800
(-) Fixed Expenses
4152000
Operating Income
$1292800
Old Operating Income
2852000
Decrease in Net Income
$1559200
A
Increase in Sales Revenue
$612000
B=A x Contribution margin ratio
Profits are underestimated by [612000 x 44%]
$269280
A
Total Sales Revenue
$15600000
B
Break Even Sales revenue calculated above
$9118182
C=A-B
Margin of Safety in Dollars
$6,481,818
A
Contribution margin
$6864000
B
Operating Income
$2852000
C=A/B
Operating Leverage
2.407
A
If there’s an Increase in Sales revenue by
20%
B=A x Operating Leverage
Percentage increase in Profits will be [20% x 2.407]
48.14%
Units
per Unit ($)
Amount ($)
Sales
65000
240
15600000
(-) Variable cost
65000
134.4
8736000
Contribution margin
65000
105.6
6864000
(-) Fixed Expenses
4012000
Operating Income
$2852000
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