Stratford Company distributes a lightweight lawn chair that sells for $80 per un
ID: 2447194 • Letter: S
Question
Stratford Company distributes a lightweight lawn chair that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 annually. Required: I. What is the product's CM ratio? (Do not round intermediate calculations. Omit the "%"' sign in your response.) CM ratio 2. Use the CM ratio to determine the break-even point in sales dollars. (Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.) Break-even point in sales dollars 3. The company estimates that sales will increase by $58,000 during the coming year due to increased demand. By how much should net operating income increase? (Omit the "$" sign in your response.) Net operating income increases by 4. Assume that the operating results for last year were as follows Sales Variable expenses $2,160,000 1,080,000 Contribution margin Fixed expenses 1,080,000 180,000 Net operating income $ 900,000 a. Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.) Degree of operating leverage b. The president expects sales to increase by 20% next year. By how much should net operating income increase? (Round your intermediate calculations to 2 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.) Net operating income increases byExplanation / Answer
1. CM ratio = (sales-variable costs)/sales = (80-40)/80 = 50%
2. breakeven = Fixed expenses/CM ratio = 180,000/50% = $360,000
3. Increased amount of sales = $58,000. It means that 58,000/80 = 725 more units were sold. Contribution from these 725 units = 725*(80-40) = 29,000. Fixed expenses will remain the same. So, net operating income will go up by $29,000
4.Degree of operating leverage = (sales - variable costs)/sales - variable costs - fixed costs
= (2,160,000-1,080,000)/(2,160,000-1,080,000 - 180,000) = (1,080,000/900,000) = 1.20
4b. sales increases by 20%. Thus 1.2 = change in operating income/change in sales
1.2 = change in operating income/20%
change in operating income = 1.2*20% = increase of 24%
5. unit sales next year = 30,000*1.5 = 45,000 units. selling price after reduction = 80*(1-13%) = $69.60. Fixed costs (advertising ) will increase by $69,000 to become = 180,000+69,000 = 249,000
Net income margin last year = 1,020,000/2,400,000 = 43%. This year = 1,083,000/3,132,000 = 35%. There is a 8% fall in operating margin. Thus i will not recommed the sales manager's policy as it is hurting the bottomline.
6. Units sold = 30,000*2 = 60,000. price per unit = 80. variable cost per unit = 40+1.9 = 41.9. let increase in advertising be "x". new fixed costs = 180,000+x
Profit = (80-41.9)*60,000 - 180,000 - x = 2,286,000 - 180,000 - x = 2,106,000 - x
Now, earlier profit = 1,020,000
so, 2,106,000 -x = 1,020,000
or x = 1,086,000. Thus advertising costs can be increased by $1,086,000
Last year This year In units In $ In units In $ Sales 30,000 2,400,000 45,000 3,132,000 less: variable expenses 1,200,000 1,800,000 Contribution margin 1,200,000 1,332,000 less: fixed expenses 180,000 249,000 Net operating income 1,020,000 1,083,000