Stratford Company distributes a lightweight lawn chair that sells for $40 per un
ID: 2430273 • Letter: S
Question
Stratford Company distributes a lightweight lawn chair that sells for $40 per unit. Variable expenses are $16 per unit, and fixed expenses total $672,000 annually Required: Answer the following independent questions 1. What is the product's CM ratio? ontribution margin ratio 601% 2. Use the CM ratio to determine the break-even point in sales dollars Break-even point in sales dollars 1,120,000 3. The company estimates that sales will increase by $115,000 during the coming year due to increased demand. By how much should net operating income increase? Increase in operating income b9,000 4. Assume that the operating results for last year were as follows Sales Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income $1,680,000 672,000 1,008,000 672 000 336,000 a. Compute the degree of operating leverage at the current level of sales. (Round your answer to 1 decimal place.) Degree of operating leverage 3.0Explanation / Answer
1) Contribution margin ratio 60% Working: Contribution margin = Sales - Variable cost = $ 40 - $ 16 = $ 24 Contribution margin ratio = Contribution margin/Sales = $ 24 / $ 40 = 60% 2) Break even point in sales dollars $ 11,20,000 Working: Break even point in sales dollars = Fixed Cost/CM ratio = $ 6,72,000 / 60% = $ 11,20,000 3) Increase in operating income Working: Increase in operating income = Increase in sales *Contribution margin ratio = $ 1,15,000 x 60% = $ 69,000 4) a. Degree of operating leverage 3.0 Working: Degree of operating leverage = Contribution Margin/Net Operating Income = 10,08,000 / 3,36,000 = 3.0 b. Increase in operating income $ 4,03,200 Working: Increase in net operating income = Increase in sales *Degree of operating leverage (%) = 40% x 3.0 = 120% Increase in net operating income = $ 3,36,000 x 120% ($) = $ 4,03,200 5.a Last Year Proposed Total Per Unit Total Per Unit Sales $ 17,60,000 $ 40 $ 20,59,200 $ 36 Variable cost $ 7,04,000 $ 16 $ 9,15,200 $ 16 Contribution margin $ 10,56,000 $ 24 $ 11,44,000 $ 20 Fixed Cost $ 6,72,000 $ 8,28,000 Net Operating income $ 3,84,000 $ 3,16,000 Working: Revised selling price = 40*(1-0.10) = $ 36.00 Revised Fixed cost = $ 6,72,000 + 1,56,000 = $ 8,28,000 Revised sales units = 44000*(1+0.30) = 57,200 5.b No Net operating income reduced as a result of proposal.So, suugestion should not be accepted.