Klein Company distributes a high-quality bird feeder that sells for $30 per unit

Question

Klein Company distributes a high-quality bird feeder that sells for $30 per unit. Variable costs are $12 per unit, and fixed costs total $291,000 annually. Required: Answer the following independent questions: 1. What is the product's CM ratio? CM ratio 2. Use the CM ratio to determine the break-even point in sales dollars. Break-even point in sales dollars 3. The company estimates that sales will increase by $67,000 during the coming year due to increased demand. By how much should operating income increase? Operating income increases by

Explanation / Answer

1. The CM ratio is 60%:

Selling price........................................$30          100%

Variable expenses............................. $12           40%

Contribution margin............................$18           60%

2. Break-even point in total sales dollars

            Fixed Expenses/CM ratio

            $291000/0.60 = $485000

3. $67000 increased sales × 60% CM ratio = $40200 increased contribution margin. Since fixed costs will not change, operating income should also increase by $40200.

4. a. Degree of operating leverage = Contribution margin / Operating income

= $388000 / $97000 = 4 times

b. Operating Income increases by = 4 x 16% = 64%

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