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1 Directions: Complete the Part 1 by putting formulas into the cells as requeste

ID: 2335964 • Letter: 1

Question

1 Directions: Complete the Part 1 by putting formulas into the cells as requested 2 Complete Part 2 by analyzing qualitative factors. 3 Part 1: Quantitative Analysis Joseph A. Bobcat Company operates a chain of men's clothing stores that sells 10 different styles of inexpensive men's suits with identical unit costs and selling prices. A unit is defined as one suit. Each store has a manager who is paid a fixed salary Individual sales peoplereceive a fixed salary and a sales commission. Bobcat Co. is considering opening another store that is expected to have the revenue and cost relationships show in Exhibit A. 4 EXHIBITA Unit data (per suit) Annual Fixed Costs 160.00 120.00 $ 128.00 8 Selling price per unit 9 Rent Salaries Advertising Other fixed costs 45,000 200,000 $50,000 $25,000 $320,000 Variable cost per unit 10 11 12 13 Tax rate Cost of suits Sales commission Variable cost per unit 40% Plan 2 increase Fixed cost by: 80,000 1 Using the information in Exhibit A, create a contribution margin income statement for each sales level below. Also calculate break-even revenues, the margin of safety, and operating leverage. To receive full credit, yellow cells should contain only cell references and no numbers. Units Sold 9,000 10,000 11,000 12,000 13,000 19 20 21 Revenue 1,440,000 $ 1,600,000 $ 1,760,000 $ 1,920,000 2,080,000 Variable costs1152,000 _1,280,000 1408,000 1,536,000 1,664,000 Contribution margin 288,000 $ 320,000 $ 352,000 384,000 $ 416,000 20,000 S320,000320,000 320,000 -S32,000 64,000 $ 96,000 Fixed costs 320,000 Operating Income $ (32,000) $ After-tax Income GRADING 1 point for correct AT income 23 25 26 27 Break-even Revenues Margin of Safety Operating Leverage 1 point for correct Break-even Revenues 1 point for correct Margin of Safety 1 point for correct Operating Leverage calculation 29 30

Explanation / Answer

Joesph A. Bobcat Company

Contribution Margin Income Statement

Units Sold

9,000

10,000

11,000

12,000

13,000

Revenue at $160 per unit

$1,440,000

$1,600,000

$1,760,000

$1,920,000

$2,080,000

Variable costs at $128 per unit

$1,152,000

$1,280,000

$1,408,000

$1,536,000

$1,664,000

Contribution Margin at $32 per unit

$288,000

$320,000

$352,000

$384,000

$416,000

Fixed Costs

$320,000

$320,000

$320,000

$320,000

$320,000

Operating Income

($32,000)

$0

$32,000

$64,000

$96,000

After-tax income (operating income x 60%)

($32,000)

$0

$19,200

$38,400

$57,600

Break-even Revenues

$1,600,000

$1,600,000

$1,600,000

$1,600,000

$1,600,000

Margin of Safety

($160,000)

$0

$160,000

$320,000

$480,000

Operating Leverage

N/A

N/A

11

6

4.33

Computations –

After tax operating income = 60% of operating income

At 9,000 units the company reports a loss of $32,000

At 10,000 units the company break-evens and the after tax operating income is zero.

At 11,000 units, after tax operating income = 60% x 32,000 = $19,200

At 12,000 units, after tax operating income = 60% x 64,000 = $38,400

At 13,000 units, after tax operating income = 60% x 96,000 = $57,600

Break-even revenues = fixed cost/contribution margin ratio

Contribution margin ratio = (unit sales price –variable cost per unit)/unit sales price x 100

= ($160 - $128)/$ 160 = 0.2 or 20%

Fixed cost = $320,000

Break-even revenues = 320,000/0.2 = $1,600,000

Margin of safety = actual sales – break-even sales

For 9,000 units MOS = $1,440,000 - $1,600,000 = -$160,000

For 10,000 units, MOS = $1,600,000 - $1,600,000 = $0

For 11,000 units , MOS = $1,760,000 - $1,600,000 = $160,000

At 12,000 units, MOS = $1,920,000 - $1,600,000 = $320,000

At 13,000 units, MOS = $2,080,000 - $1,600,000 = $480,000

Degree of operating leverage = contribution margin/operating income

For 9,000 units the operating income is negative hence no operating leverage.

At 10,000 units, the operating income is zero and hence no operating leverage.

At 11,000 units, 352,000/32,000 = 11

At 12,000 units, 384,000/64,000 = 6

At 13,000 units, 416,000/96,000 = 4.33

Contribution Margin Income Statement

Units Sold

9,000

10,000

11,000

12,000

13,000

Revenue at $160 per unit

$1,440,000

$1,600,000

$1,760,000

$1,920,000

$2,080,000

Variable costs at $128 per unit

$1,152,000

$1,280,000

$1,408,000

$1,536,000

$1,664,000

Contribution Margin at $32 per unit

$288,000

$320,000

$352,000

$384,000

$416,000

Fixed Costs

$320,000

$320,000

$320,000

$320,000

$320,000

Operating Income

($32,000)

$0

$32,000

$64,000

$96,000

After-tax income (operating income x 60%)

($32,000)

$0

$19,200

$38,400

$57,600

Break-even Revenues

$1,600,000

$1,600,000

$1,600,000

$1,600,000

$1,600,000

Margin of Safety

($160,000)

$0

$160,000

$320,000

$480,000

Operating Leverage

N/A

N/A

11

6

4.33