3) McCall Distributing Company distributes a lightweight children\'s sled for $2

Question

3) McCall Distributing Company distributes a lightweight children's sled for $20 per unit. Fixed costs are $180,000 Variable costs per sled are $ 5 for materials and $3 for labor. annually. Answer each of the following questions as independent questions, meaning they all begin with the above scenario and do NOT build on each other. Remember to show all work! A) What is the CM ratio for the sled? B) Determine the break-even point in sales dollars. C) If sales increase by $50,000 during the coming year due to demand, how much should net operating income increase? D) Current operating results are: Sales Revene$400,000 Variable Costs 160,000 Fixed Costs 180,000 Calculate the company's degree of operating leverage and new net operating income if sales increased by 20%.

Explanation / Answer

Contribution per unit

= Selling price per unit – Variable costs per unit

= $20 - $5 - $3

= $ 12 per unit

A)

Contribution margin ratio

= Contribution / Sales x 100

= $12 / $20 x 100

= 60%

B)

Break even point in Sales dollars

= Fixed costs / Contribution margin ratio

= $180,000 / 60%

= $ 300,000

C)

Since fixed costs are fixed, If sales increase, Operating Income will increase by the contribution amount generated by increased sales

So, Increase in operating Income

= Increase in Sales x Contribution margin ratio

= $50,000 x 60%

= $ 30,000

D)

Degree of operating leverage at present

= Contribution margin / Net Operating Income

The following table shows the calculations

New Sales

= Current sales x 1.20

= $400,000 x 1.20

= $480,000

Variable cost ratio

= 1 – Contribution margin ratio

= 1 – 0.60

= 0.40

So, Variable costs

= Sales x Variable cost ratio

= $480,000 x 0.40

= $192,000

The following table shows the calculations

Calculations Particulars A Sales    400,000 B Variable costs    160,000 C = A - B Contribution    240,000 D Fixed costs    180,000 E = C - D Operating Income      60,000 F = C / E Degree of operating leverage                 4

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