Darringer Products manufactures recreational equipment. One of the company’s pro

ID: 2511078 • Letter: D

Question

Darringer Products manufactures recreational equipment. One of the company’s products, a skateboard, sells for $34. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $20.40 per skateboard of which 60% is direct labor cost.

Over the past year the company sold 53,000 skateboards, with the following operating results:

Sales (53,000 skateboards) Variable expenses $1,802,000 1,081,200 Contribution margin Fixed expenses 720,800 584,800 Net operating income S 136,000 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards Required: 1a. Compute the CM ratio and the break-even point in skateboards. (Round your contribution margin answer to the nearest whole percent. Round up your break even answer to the nearest whole number.) 40% Contribution margin ratio Unit sales to break-even point 43,000 skateboards 1b. Compute the degree of operating leverage at last years level of sales. (Round your answer to 2 decimal places.) of operating leverage 5.30 2. Due to an increase in labor rates, the company estimates that variable costs will increase by $2.72 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at S34.00, what will be the new CM ratio and the new break-even point in skateboards? (Round your contribution margin answer to the nearest whole percent. Round up your break even answer to the nearest whole number.) Contribution margin ratio Unit sales to break-even point 53,750 skateboards 3. Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $136,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Number of skateboards 66.2 4. Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.) price 38.53

Explanation / Answer

Solution:

Part 5 –

New variable cost per unit = $20.40 – Reduction 40% of $20.40 = $12.24

New Fixed Cost = Old 584,800 + Increase by 92% of 584,800 = $1,122,816

Selling Price = $34

Contribution Margin per unit = Selling Price 34 – New Variable Cost per unit 12.24 = $21.76

Contribution Margin Ratio = CM per unit 21.76 / Unit Selling Price 34 x 100 = 64%

Unit sales to break even point = Total Fixed Cost / Contribution Margin per unit

= $1,122,816 / 21.76

= 51,600 Skateboards

Part 6(a) –

Number of Skateboards to be sold to achieve $136,000 operating income = (Total Fixed Cost + Desired Income) / CM per unit

= (1,122,816 + 136,000) / 21.76

= 57,850 Skateboards

Part 6(b-1) – Contribution Format Income Statement

Contribution Income Statement

Sales Revenue (53,000 * $34)

$1,802,000

Less: Variable Cost (53,000*12.24)

$648,720

Contribution Margin

$1,153,280

Fixed Costs

$1,122,816

Operating Income

$30,464

Part 6(b-2)

Degree of Operating Leverage = Contribution Margin / Operating Income

= $1,153,280 / 30,464

= 37.86

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