Use the following contribution margin statement for 2009: Required: a) How much

Question

Use the following contribution margin statement for 2009:

Required:
a) How much is the price per unit, unit variable cost and unit contribution margin?
price=    unit VC=    unit CM=  

b) Write down the CVP relation: profit as a function of sales volume in units
(fill in the missing numbers in an equation like: Profit = 2 *Volume - 50).
Profit =  *Volume -  

c) If sales volume increases by 20% (from 100 to 120), how much is the $ change in profits?


d) What is the sales volume required to achieve target profit of $1,750?


e) How much is the breakeven volume?

Breakeven revenue?


f) How much is the margin of safety (at current sales volume of 100 units)?
(enter percentages as a fraction of 1, i.e., enter 23.47% as 0.2347)  

g) Based on the margin of safety computed in (f), will you start making a loss if sales drop by 30%?
(enter 1 for yes, 2 for no)  

h) How much is the operating leverage (at current sales volume of 100 units)?
(enter percentages as a fraction of 1, i.e., enter 23.47% as 0.2347)  

If fixed costs increase, will it increase or decrease the operating risk?
(enter 1=increase, 2=decrease)

2009 Sales volume (#units) 100 Revenue $4,500   Variable costs $2,000 Contribution margin $2,500   Fixed costs $1,500 Profit $1,000

Explanation / Answer

a) Price p.u. =4500/100 = 45 , VC p.u. =2000/100 = 20, Cont Margin p.u. = 2500/100 = 250

b) Profits = Sales - Variable expenses - Fixed expenses

Profits = 100*45 - 20*100- 1500

Profits = 1000

c) Profits = 45*120 - 20*120 - 1500 = 1500

Change in profit = 1500-1000=500

d) Profits = Sales - Variable expenses - Fixed expenses

1750 = 45* x - 20* x - 1500

x = 130

Hence, required sales volume is 130 units

e) Breakeven volume = Total Fixed Cost / (Selling price - variable cost per unit

= 1500/ (45-20) = 60units

Break even Revenue = (Fixed Costs) / (1 - (Variable cost per unit/Selling Price per unit))

= (1500) / (1-20/45) = 833.33

f) Margin of safety = (Current sales level - Breakeven Point) / Selling price per unit

   = (100-60) / 45 = .8888

g) 2 : No

h) Operating Leverage = Contribution Margin / Net operating Income

   = 2500/1000 = 2.5

The degree of operating leverage can be used to estimate how a given percentage change in sales volume will affect net income at a given level of sales, assuming there is no change in fixed expenses. So in given case if fixed cost increase it will lead to increase in operating risk.

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