The following is Arkadia Corporation\'s contribution format income statement for
ID: 2521383 • Letter: T
Question
The following is Arkadia Corporation's contribution format income statement for last month: Sales Variable expenses Contribution margin Fixed expenses Net operating income $1,200,000 800,000 400,000 245,000 $155,000 The company has no beginning or ending inventories and produced and sold 20,000 units during the month Required: a. What is the company's contribution margin ratio? b. What is the company's break-even in units? c. If sales increase by 180 units, by how much should net operating income increase? d. How many units would the company have to sell to attain a target profit of $138,000? e. What is the company's margin of safety in dollars? f. What is the company's degree of operating leverage?Explanation / Answer
a. Contribution Margin Ratio = Contribution Margin / Sales = $ 400,000 / $ 1,200,000 = 33.33 %.
b. Unit Contribution Margin = $ 400,000 / 20,000 = $ 20
Break -even in units = Total Fixed Expenses / Unit Contribution Margin = $ 245,000 / $ 20 = 12,250 units.
c. If sales increase by 180 x $ 60 = $ 10,800,
Net operating income would increase by $ 10,800 x 33.33% = $ 3,600
d. Required sales in units to attain target income = ( Fixed Expenses + Target Income ) / Unit Contribution Margin = $ ( 245,000 + 138,000) / $ 20 = 19,150 units.
e. The company's margin of safety in dollars = Actual Sales Revenue - Break-even Sales Revenue = ( 20,000 - 12,250) x $ 60 = $ 465,000
It can also be computed as Net Operating Income / Contribution Margin Ratio = $ 155,000 / 33.33% = $ 465,000.
f. Degree of Operating Leverage = Contribution Margin / Net Operating Income = $ 400,000 / $ 155,000 = 2.58
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