Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would
ID: 2556089 • Letter: H
Question
Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $18,000 and at that price, Thad estimates 100 units would be sold each year. The variable cost to produce and sell the cycles would be 511,200 per unit. The annual fixed cost woud be $458,000. a. What is the break-even in unit sales? Break-ewen in unit sales b. What is the margin of safety in dollars? Margin of safety in dollars c What is the degree of operating leverage? (Round your answer to 2 decimal places.) Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to 513,800 to compete effectively. In that event, Thad would also reduce fioxed expenses to 5434,000 by reducing advertising expenses, but he still hopes to sell 100 units per year What would the net operating income be in this situation? (Negative amount should be indicated by a minus sign.) d. Net operating income (loss)Explanation / Answer
5
a)
Unit sales = 100
Units Selling price per unit = $16,000 per unit
Variable expenses per unit = $11,200 per unit
Fixed expenses= $456,000
Compute the CM ratio and variable expense ratio
Selling price per unit = $16,000 per unit
Variable expenses per unit= 11,200 per unit
Contribution margin per unit = $4,800 per unit
CM ratio = 30%
Variable expense ratio = 70%
Compute the break-even
Break-even in unit sales = Fixed cost / contribution margin
= 456000 / 0.30
= 1,520,000
Break-even in dollar sales = $1,520,000
b)
Compute the margin of safety
Margin of safety in dollars = Actual sales – Break even sales
= 1,600,000 – 1,520,000
= 80,000
Margin of safety percentage = Margin of safety in dollars / actual sales
= 80000 / 1600000
= 5%
c)
Compute the degree of operating leverage
Sales = $1,600,000
Variable expenses= 1,120,000
Contribution margin = 480,000
Fixed expenses = $456,000
Net operating income = $ 24,000
Degree of operating leverage = 1.5
d)
Unit sales = 100
Fixed expenses= $434,000
Units Selling price per unit = $13,800 per unit
Variable expenses per unit = $11,200 per unit
Contribution margin = $ 2600 per unit
Total contribution = $2600 * 100 = 260000
Fixed expenses= $434,000
Profit/(loss) = (174000)
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