Managerial Accounting Quiz 4 – Summer 2018 Chapters 5 and 6 Name________________

Question

Managerial Accounting Quiz 4 – Summer 2018

Chapters 5 and 6                                               Name________________________

10 Points

Show all supporting computations.

1. What is Hurst’s Contribution Margin per unit? What is their Contribution Margin Ratio?

2. What is Hurst’s break-even point in Units and in Dollars?

3. How many units would Hurst Co. need to sell to make a target profit of $16,000? What would their sales dollars be at this level?

4.What is the margin of safety in units and dollars assuming a current sales level of 43,500 units?

Using the current sales level of 43,500, what is the operating leverage? Use the operating leverage to predict the increase in net income if sales increase by 20%. Prove the percentage increase predicted by preparing a contribution margin format income statement.

Explanation / Answer

Answer (1) -Calculation of Contribution margin per unit and contribution ratio:

A. Sales per unit = $40   

B. Variable cost = $26

C. Contribution margin per unit (A-B) = $14

D. Contribution margin ratio = (Contribution /Sales) X 100 = (C/A) X 100 = (14/40) X 100 = 35%

Answer-2 Calculation of Break even point in unit and dollars:

Break even point in units = Fixed cost/Contribution per unit

= $532,000/ $14 per unit

= 38,000 units

Break even point in dollars = Break even point in units X selling price per unit

= 38,000 units X $40 per unit

= $1,520,000

Answer 3- calculation of no. of units to be sold to get a profit of $16,000:

No. of units required to be sold = (Fixed cost + desired profit)/contribution per unit

= ($532,000 + $16,000)/$14 per unit

= 39,143 units.

Sales dollar value = 39,143 units X $40 per unit = $1,565,720

Answer 4- Calculation of Margin of safety:

Margin of safety in units = Current sales level in units - Break even sales in units = 43,500 - 39,143 = 4,357 units.

Margin of safety in dollars = 4,357 units X $40 per unit =$174,280

Calculation of operating leverage:

Operating leverage formula = Contibution margin / Net profit

Contribution margin when sales quanity is 43,500 units = 43,500 units X $14 per unit = $609,000

Net profit when sale quantity of 43,500 units = Contribution - Fixed cost

= (43,500 units X $14 per unit) - $532,000

= $77,000

Therefore operating leverage = $609,000 / $77,000 = 7.91 (Approximately)

Indicates that each percentage increase in sales revenue is expected to generate a 7.91% increase in operating profit.

So, if sales are increased by 20% the operating will be increased by 158.2% (20% X 7.91).

Lets assume that the sales has been increased by 20%:

Sales units = 43,500 units + 20% = 52,200 units

Income statement:

52.200 units 43,500 units

A. Sales revenue @ $40 per unit = 52,200 units X $40 per unit = $2,088,000 $1,740,000

B. Variable cost @ $20 per unit = 52,200 units X $26 per unit = $1,357,200 $1,131,000

C. Contribution margin (A-C) = $730,800 $609,000

D. Fixed cost = ($208,000 + $324,000) = $532,000 $532,000

E. Net profit (C-D) = $198,800 $77,000

Using operating leverage calculation of Increase in net profit if there is increse in sales by 20% = $77,000 X 158.2% = $121,814

Hence proved

Hope this is useful And thank you!!!!!

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