Contribution format income statement for the most recent month is Sales ( 40000

Question

Contribution format income statement for the most recent month is Sales ( 40000 units) is $800000 Variable expenses are 560000 contribution margin is 240000 fixed expenses 192000 and net operating income 48000. 1) new equipment is coming so variable expenses will reduce by $6 per unit, however fixed expenses would increase to a total of $432000 ea month. prepare two contribution format income statements, one showing present operations and one showing how operations would be with the new equipment causes the changes. Show amt column, per unit column, and percent column. 2) on the above figures for both present and proposed compute a degree of operating leverage, the break even point in dollars and margin of safety in both dollars and percentage terms.3) which of these figures would be paramount in deciding whether to get the new equipment? 4) refer to the original data and instead of new quipment the marketing manager wants to make a new approach that would ncrease sales 50% without any change in sellingprice the companys new fixed expenses would be $240000 and its net operating income would increase by 25%. Compute the break even point in dollar sales under the new plan. Do you agree with this new plan?

Explanation / Answer

Answer 1. Contribution Format Income Statement Present Operations Amount Sales in Units                         40,000 Sales in $                      800,000 Variable Expenses                      560,000 Contribution                      240,000 Fixed Expenses                      192,000 Operating Income                         48,000 Contribution Format Income Statement After New Equipment is Purchased Amount Sales in Units                         40,000 Sales in $                      800,000 Variable Expenses (14-6) X 40000                      320,000 Contribution                      480,000 Fixed Expenses                      432,000 Operating Income                         48,000 Answer 2. Present Operations After Equipment is Purchased Degree of Operating Leverage                                   5                                  10 (Contribution Income / Operating Income) (240000/48000) (480000/48000) Break Even point in $                      640,000                        720,000 (Fixed Cost / Contribution Margin Ratio) (192000/30%) (432000/60%) Contribution Margin Ratio 30% 60% (Contribution / Sales) (240,000/800,000)   (480,000/800,000)   Margin Of Safety in $                      160,000                          80,000 (Sales - BEP in $) (800,000-640,000) (800,000-720,000) Margin Of Safety in % 20% 10% (Sales - BEP in $)/Sales 160000/800000 80000/800000 Answer 3. The new equipment will be purchased or not depends on the future predictions or the growth of the Company. If the Company predicts higher growth or increase in sales is higher in future - Then it will purchase the Equipment, since its opearting levarage is higher than the present Condition. It will maximise its profit in increase in sales. In case of lower sales, then the new equipment should not be purchased. Answer 4. Contribution Format Income Statement in Proposed Plan Amount Sales in Units (40000 + 20000)                         60,000 Sales in $                   1,200,000 Variable Expenses                      900,000 Contribution                      300,000 Fixed Expenses                      240,000 Operating Income (48000 X 1.25)                         60,000 Contribution Margin Ratio 25% Break Even point in $ = 240,000 / 25% = $960000

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