The following is Alsatia corporation\'s contribution format income statement for
ID: 2387184 • Letter: T
Question
The following is Alsatia corporation's contribution format income statement for last month:Sales................... $1400000
Variable expenses ..... 90000
Contribution margin...500,000
Fixed expenses.........300,000
Net operating income..$200,000
The company has no beginning or ending inventories and produced and sold 10,000 units during the month.
Required:
a. What is the company's contribution margin?
b. What is the company's break-even in units?
c. If sales increase by 100 units, by how much should net operating income increase?
d. How many units would the company have to sell to attain target profits of $225,000?
e. What is the company's margin of safety in dollars?
f. What is the company's degree of operating leverage?
Explanation / Answer
(a). Contribution margin: Contribution margin = Sales - variable expenses = 1,400,000 - 900,000 Contribution margin = $500,000 (b). Break-even point in units: Break-even point in units can be calculated using the profit equation as follows; Profit = Selling price (x) - Variable cost per unit (x) - Total fixed cost Here selling price (1,400,000/10,000) = $140 Variable cost per unit (900,000/10,000) = 90 Total fixed cost = 300,000 x is the required sales units to meet the break-even point. Profit is 0 zero at the break-even point. So 0 = 140 (x) - 90 (x) - 300,000 50 (x) = 300,000 So x = 300,000/50 X = 6,000 units. 6,000 units required to meet the break-even point. (c). Increase in net operating income with the increase in sales: Increase in sales units = 100 Total sales units = 10,100 Total sales ($140 x 10,100) = $1,414,000 Total variable cost ($90 x 10,100) = 909,000 Contribution margin = $505,000 Fixed expenses = 300,000 Net operating income = $205,000 The increase in net operating income for the increase in the sales by 100 units are $5,000 (d). Profit = Selling price (x) - Variable cost per unit (x) - Total fixed cost 225,000 = 140 (x) - 90 (x) - 300,000 50 (x) = 525,000 x = 525,000/50 So x = 10,500 units. The company has to sell 10,500 units to attain a profit of $225,000. (e). Margin of safety in dollars: Margin of safety = Expected sales - Break-even sales = 10,000 - 6,000 Margin of safety = 4,000 units Margin of safety in dollars ($140 x 4,000) = $560,000 (f). Degree of operating leverage: A high level of fixed costs indicates the high level of operating leverage. Here the company's fixed cost is very low when comparing to the variable cost so the degree of operating leverage is low. A high level of fixed costs indicates the high level of operating leverage. Here the company's fixed cost is very low when comparing to the variable cost so the degree of operating leverage is low.Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.