Please show all work. 1. One spring, Jake and Chad Driller decided to earn money

Question

Please show all work.

1. One spring, Jake and Chad Driller decided to earn money providing professional athletic coaching and training services. As the business, Drillmaker's Inc., has grown, they have expanded into product sales and recreation related construction projects. They are currently contracting with several recreation facilities across the state to design and build volleyball courts. They are six months into the planning and production of the courts and the information for the current month, August, is as follows:

Required: (round all dollars to whole dollars, refer to August information to compute a - g)
Compute the following items:
a. Unit contribution margin.
b. Contribution margin ratio.
c. Break-even in dollar sales.
d. Margin of safety percentage.
e. If the sales volume increases by 40% with no change in total fixed expenses, what will be the change in net operating income?
f. If the per unit variable production costs increase by 20%, and if fixed selling expenses increase by 15%, what will be the New Net Operating Income? New break-even point in dollar sales? New break-even point in units?

g. Calculate the degree of operating leverage (round two decimal places). What would net income be if sales increase by 25%?

2. Given the following and assuming that costs of goods sold and the selling expense are a mixed cost.

Required: (refer to August information to answer b - f)
a. Using the high low method, separate each mixed expense into its variable and fixed components. State the cost formula for each mixed expense.

b. What is the unit product cost for the month under variable costing?
c. What is the unit product cost for the month under absorption costing?
d. Prepare a contribution format income statement for the month using variable costing.
e. Prepare an income statement for the month using absorption costing.

f. Reconcile the variable costing and absorption costing net operating incomes for the month.  

Sales (7 courts) $431,000 Variable expenses: Cost of goods sold $221,100 Selling Expense 21,000 242,100 Contribution Margin 188,900 Fixed Expenses: Selling Expenses 31,000 Depreciation 14,000 Executive salaries 36,000 81,000 Net Operating Income 107,900

Explanation / Answer

a.

Unit Contribution margin = Contribution margin/Sales volume

Unit contribution margin = $188,900/7 courts = $26,985.71 per court

b.

Contribution margin ratio = Contribution margin/Sales = $188,900/$431,000 = 0.44

c.

Break-even in dollar sales = Fixed expenses/Contribution margin ratio = $81,000/0.44 = $184,090.90

d.

Margin of safety sales = Actual sales – Breakeven sales = $431,000 - $184,090.90 = $246,909.10

Margin of safety percentage = Margin of safety sales/Actual sales = $246,909.10/$431,000 = 0.5729 = 57.29%

e.

Proposed sales volume = 7 courts * 140% = 9.8 courts i.e.10 courts

Proposed contribution margin = 10 courts * $26,985.71 = $269,857.10

With fixed expenses remaining unchanged,

Increase in net operating income = Increase in contribution margin = $269,857.10 - $188,900 = $80,957.10

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