Dana\'s Ribbon World makes award rosettes. Following is information about the co
ID: 2544948 • Letter: D
Question
Dana's Ribbon World makes award rosettes. Following is information about the company s 280 Required 1. Suppose Dana's would like to generate a profit of $1,080. Determine how many rosettes it must sell to achieve this target profit. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.) 2. If Dana's sells 2,100 rosettes, compute its margin of safety in units, in sales dollars, and as a percentage of sales. (Round your Margin of Safety percentage to two decimal places (i.e. .1234 should be entered as 12.34%). 3. Calculate Dana's degree of operating leverage if it sells 2,100 rosettes. (Round your intermediate calculations to 2 decimal places and final answer to 4 decimal places.) 4. Using the degree of operating leverage, calculate the change in Dana's profit if unit sales drop to 1,848 units. Confirm this by preparing a new contribution margin income statement. (Round your intermediate calculations to 4 decimal places and final answer to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))Explanation / Answer
1. Target units = (Total Fixed costs + Target profit)/Contribution per unit = ($4800 + $1080)/($5 - $2.60) = $5880/$2.40 = 2450
2.
Margin of safety (units) = Actual sales - Break-even sales
Break-even sales (units) = Total fixed costs/Contribution per unit = $4800/$2.40 = 2000
Margin of safety (units) = 2100 - 2000 = 100
Margin of safety in dollars = 100 x $5 = $500
Percentage of sales = Margin of safety/Actual Sales = 100/2100 = 4.76%
3. Degree of Operating leverage = Contribution margin / Net operating income = $5040/$240 = 21
Contribution margin = 2100 x $2.40 = $5040
Net operating income = Contribution margin - Fixed costs = $5040 - $4800 = $240
4. Effect on profit = 252%
Decrease in sales = 2100 - 1848 = 252
Percentage decrease in sales = 252/2100 = 12%
Percentage decrease in net operating income = 12% x 21 = 252%
Margin of safety (units) 100 Rosettes Margin of safety in dollars $500 Percentage of sales 4.76 %Related Questions
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