Tyrene Products manufactures recreational equipment. One of the company\'s produ

Question

Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for S36. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totaling $25.20 per skateboard, of which 70% is direct labour cost. Over the past year the company sold 52,000 skateboards, with the following operating results s 1,872,000 Sales (52,000 skateboards) 1,310,400 Variable expenses Contribution margin Fixed expenses 561,600 453,600 Net operating income 5 108,000 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards. Requirec 1a. Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Contribution margin Unit sales to break-even point skateboards 1b. Compute the degree of operating leverage at last year's level of sales. (Round your answer to 2 decimal places.) gree of operating leverage 2. Due to an increase in labor rates, the company estimates that variable costs will increase by S1.80 per r skateboard remains constant at skateboard next year. If this change takes place and the sellin 536.00, what will be the new CM ratio and the new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number. g price per Contribution margin Unit sales to break-even point 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, S108,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) umber of skateboards 4. Refer again to the data in (2) above. The president has decided that the company may have to raise the of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year selling price 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.) ng price

Explanation / Answer

1. Contribution margin ratio = [sales price per unit - variable cost per unit] / sales price per unit

= [36 - 25.2] / 36

=10.8/36

=30%

units sale to break even point = Fixed cost / contribution margin per unit

= $453600 / $10.8

= 42000

Degree of operating leverage = Contribution margin / operating income

= 561600 / 108000

= 5.2

2. Contribution margin ratio = [sales price per unit - variable cost per unit] / sales price per unit

= [36 - (25.2+1.8)] / 36

= 9 / 36

= 25%

units sale to break even point = Fixed cost / contribution margin per unit

= $453600 / $9

= 50400

3. Deisred profit break even sales = [Fixed cost + profit] / contribution margin per unit

=[453600 + 108000] / $9

= $561600 / $9

= 62400

5.   Contribution margin ratio = [sales price per unit - variable cost per unit] / sales price per unit

= [36 - 25.2 (1-0.2)] / 36

= [36 - 20.16 / 36

=15.84 / 36

= 44%

units sale to break even point = Fixed cost / contribution margin per unit

   = $453600 * (1+0.7) / $15.84

= $771120 / $15.84

= 48682

6. a   Deisred profit break even sales = [Fixed cost + profit] / contribution margin per unit

   = [$771120 + $108000] / $15.84

= $879120 / $15.84

= 55500

b.   Sales (52000 * $36) = 1872000

less: variable cost (52000 * $20.16) = 1048320

Contribution margin = 823680

less: Fixed cost = 771120

net operating income = $52560

b-2   Degree of operating leverage = Contribution margin / operating income

= 823680 / 52560

= 15.67

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