The Hampshire Company manufactures umbrellas that sell for $12.50 each. In 2014,

Question

The Hampshire Company manufactures umbrellas that sell for $12.50 each. In 2014, the company made and sold 60,000 umbrellas. The company had fixed manufacturing costs of $216,000. It also had fixed costs for administration of $79,525. The per-unit costs of each umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead: $0.40

Variable Selling Expenses: $1.10

4. Calculate the margin of safety:

In units

In sales dollars

As a percentage

Please help correct my errors:

2. Calculate the degree of operating leverage.

Requirement 4A Margin of Safety in Units = Current Unit Sales – Break-Even Point in Unit Sales Current Unit Sales Break-Even Point in Sales Margin of Safety in Units 60,000 $45,465 14,535 Requirement 4B Margin of Safety in Dollars = Current Sales in Dollars – Break-Even Point Sales in Dollars Current Sales in Dollars Break-Even Point in Dollars Margin of Safety in Dollars $750,000 Requirement 4C Margin of Safety as a Percentage = Margin of Sales in Units / Current Unit Sales Margin of Safety in Units Current Unit Sales Margin of Safety Percentage 14,535 60,000 24%

Explanation / Answer

Answer 4B.

Current Sales unit = 60,000
Selling Price = $12.50

Current Sales in Dollars = Current Sales unit * Selling Price
Current Sales in Dollars = 60,000 * $12.50
Current Sales in Dollars = $750,000

Variable Costs per unit = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Variable Selling Expenses
Variable Costs per unit = $3.00 + $1.50 + $0.40 + $1.10
Variable Costs per unit = $6.00

Contribution Margin Ratio = (Selling Price - Variable Costs per unit) / Selling Price
Contribution Margin Ratio = ($12.50 - $6.00) / $12.50
Contribution Margin Ratio = 0.52

Fixed Costs = Fixed Manufacturing Costs + Fixed Costs for Administrative
Fixed Costs = $216,000 + $79,525
Fixed Costs = $295,525

Break-even Point in dollar sales = Fixed Costs / Contribution Margin Ratio
Break-even Point in dollar sales = $295,525 / 0.52
Break-even Point in dollar sales = $568,317

Margin of Safety in Dollars = Current Sales in Dollars - Break-even Point in dollar sales
Margin of Safety in Dollars = $750,000 - $568,317
Margin of Safety in Dollars = $181,683

Answer 4C.

Margin of Safety as a Percentage = Margin of Sales in units / Current Unit Sales
Margin of Safety as a Percentage = 14,535 / 60,000
Margin of Safety as a Percentage = 24.23%

Answer 5.

Contribution Margin = Contribution Margin per unit * Current unit sales
Contribution Margin = $6.50 * 60,000
Contribution Margin = $390,000

Operating Income = Contribution Margin - Fixed Costs
Operating Income = $390,000 - $295,525
Operating Income = $94,475

Operating Leverage = Contribution Margin / Operating Income
Operating Leverage = $390,000 / $94,475
Operating Leverage = 4.13

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