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 $35. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totaling $24.50 per skateboard, of which 70% is direct labour cost. Over the past year the company sold 57,000 skateboards, with the following operating results: Sales (57,000 skateboards) Variable expenses $1,995,000 1,396,500 Contribution margin Fixed expenses 598,500 493,500 Net operating income $ 105,000 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards

Explanation / Answer

1a.

Contribution margin = 598500/ 1995000 = 30%
Unit sales to break-even point = Fixed expenses/ Contribution per unit
= $493500/ ($35 - $24.50)
= 47000 skateboards.

1b.

Degree of operating leverage = Contribution margin/ Operating income

= $598500/ $105000 = 5.7

2.

Contribution margin = (Selling price - Variable cost)/ Selling price

= ($35 - $28)/ $35 = 20%

Unit sales to break-even point = Fixed expenses/ Contribution per unit
= $493500/ ($35 - $28)
= 70500 skateboards.

3. Number of skateboards = (Fixed expenses + Operating income)/ Contribution per unit

= ($493500 + $105000)/ $7

= 85500 skateboards

4. CM Ratio to be maintained = 30%

Variable cost to sales ratio to be maintained = 70%

New variable cost per unit = $28

Selling price = $28/ 0.70 = $40

5. New variable cost per unit = $24.5 x 70% = $17.15

Contribution margin ratio = 17.15/ 35 = 49%

Unit sales to breakeven point = Fixed expenses/ Contribution per unit
= ($493500 x 1.99)/ ($35 - $17.15)
= $982065/ $17.85
= 55018 skateboards.

b-1. Income statement

b-2. Degree operating leverage = Contribution margin/ Operating income
= $1017450/ $35385
= 28.75

Sales (57000 x $35) $1995000 Less variable cost (57000 x $17.15) -977550 Contribution margin $1017450 Less fixed expenses -982065 Net operating income $35385

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