Contribution Margin, Break-Even Units, Break-Even Sales, Margin of Safety, Degree of Operating Leverage
Aldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The division's projected income statement for the coming year is:
Sales (203,000 units @ $70) | $14,210,000 |
Total variable cost | 8,120,000 |
Contribution margin | $6,090,000 |
Total fixed cost | 4,945,500 |
Operating income | $1,144,500 |
Required:
1. Compute the contribution margin per unit, and calculate the break-even point in units. Calculate the contribution margin ratio and use it to calculate the break-even sales revenue. (Note: Round contribution margin ratio to four significant digits, and round the break-even sales revenue to the nearest dollar.)
Unit contribution margin | $ | |
Break-even point in units | ||
Contribution margin ratio | ||
Break-even sales revenue | $ |
2. The divisional manager has decided to
increase the advertising budget by $250,000. This will increase
sales revenues by $1 million. By how much will operating income
increase or decrease as a result of this action? Use your answers
from part 1 to determine the amount.
$
3. Suppose sales revenues exceed the estimated
amount on the income statement by $1,500,000. Without preparing a
new income statement, by how much are profits underestimated? Use
your answers from part 1 to determine the amount.
$
4. Compute the margin of safety based on the
original income statement. Round your answer to the nearest
dollar.
$
5. Compute the degree of operating leverage based on the original income statement. Round your answer to two decimal places.
If sales revenues are 8% greater than expected, what is the
percentage increase in operating income? Round your answer to four
decimal places before converting to a percentage. For example,
0.88349 would be rounded to 0.8835 and entered as 88.35%.
%
Contribution Margin, Break-Even Units, Break-Even Sales, Margin of Safety, Degree of Operating Leverage Aldovar Company produces...
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