hey, I need a little help on parts D & E of this question. I have answered quest
ID: 2444071 • Letter: H
Question
hey, I need a little help on parts D & E of this question. I have answered questions A,B,C correctly but am having trouble with the last two. Thanks!!Operating leverage; margin of safety; income statement
Tennessee Tonic makes a high-energy protein drink. The selling price per gallon is $7.20, and variable cost of production is $4.32. Total fixed cost per year is $316,600. The company is currently selling 125,000 gallons per year.
a. What is the margin of safety in gallons? Round to the nearest whole number.
gallons 15,069
b. What is the degree of operating leverage? Round to three decimal places. 8.295
c. If the company can increase sales in gallons by 30 percent, what percentage increase will it experience in income? Round to the nearest percent.
249%
d. If the company increases advertising by $41,200, sales in gallons will increase by 15 percent. What will be the new break-even point?
$
The new degree of operating leverage? Round your answer to two decimal places.
Explanation / Answer
selling price per gallon $7.20 variable cost $4.32 contribution margin $2.88 Fixed expenses $316,600 Break even point in units=Fixed cost /contribution margin per unit Break even point in units=316600/2.88 109930 units Margin of safety=Actual sale units-break even sale units Margin of safety=125000-109930 15069 units b. sales 125000 @$7.20 per gallons $900,000 Less:Variable expenses @4.32 per gallon $540,000 contribution margin $360,000 Less:Fixed cost $316,600 Net income $43,400 Degree of operating leverage= net income/sales Degree of operating leverage= 43400/90000=0.48 c.sales in gallons increase by 30% sales in gallons 125000*130/100 162500 sales 162500*7.20 per gallon $1,170,000 Less: variable expenses 162500*4.32 $702,000 contribution margin $468,000 Less:Fixed expenses $316,600 Net income $151,400 Net income when sale units are 162500 $151,400 Net income when sale units are 125000 $43,400 Net increase in net income $108,000 % of increase 108000/43400*100 248.84% d. if the company increase the advertisement by $41200 thenthe fixed expenses are 316600+41200 $357,800 sales gallons are increased by 15% 125000*115/100 143750 New break even point in units Fixed cost/contribution marginper unit new break even point in units=357800/2.88 124236 gallons Break even point in dollars=124236*7.20 $894,499 e.New degree of operating leverage sales 143750*7.20 $1,035,000 Less:variable expenses 143750*4.32 $621,000 contribution margin $414,000 Less:Fixed expenses $357,800 Net income $56,200 operting leverage= Changein income/change in sales operting leverage= 12800/135000=9.48
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.