Cost Volume Profit Analysis Voltar Company manufacturers and sells a specialized
ID: 2476199 • Letter: C
Question
Cost Volume Profit Analysis
Voltar Company manufacturers and sells a specialized cordless telephone for high electromagnetic radiation environments. The company’s contribution format income statement for the most recent year is given below:
Required:
Compute the company’s break-even point in both units and sales dollars.
2. Refer to the original data. Assume next year management wants the company to earn a profit of at least $90,000. How many units will have to be sold to meet this target profit?
3. Refer to the original data. Compute the company’s margin of safety in both dollar and percentage form.
4. a. Compute the company’s degree of operating leverage at the present level of sales.
b. Assume that through a more intense effort by the sales staff, the company’s sales increase by 8% next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.
5. In an effort to increase sales and profits, management is considering the use of a higher-quality speaker. The higher-quality speaker would increase variable costs by $3 per unit, but management could eliminate one quality inspector who is paid a salary of $30,000 per year. The sales manager estimates that the higher-quality speaker would increase annual sales by at least 20%. Compute the company’s new net operating income.
Explanation / Answer
Answer 1 Break even point in units = Fixed cost / Contribution margin per unit Break even point in units = $240000 / $15 = 16000 units Break even point in sales dollar = 16000 units * $60 = $960000 Answer 2 Target profit = $90000 Required contribution = target profit + fixed cost = $90000 + $240000 = $330000 Contribution margin per unit = $15 Rquired units to be sold to meet the target profit = $330000 / $15 = 22000 units Answer 3 Margin of safety in dollar = Actual sales - break even sales = $12,00,000 - $9,60,000 = $240000 Margin of safety in dollar = (Actual sales - break even sales) / Actual sales = ($12,00,000 - $9,60,000) / $12,00,000 = $240000 / $12,00,000 = 20% Answer 4 a Degree of operating leverage = Contribution Margin / Operating Income = $300000/$60000 = 5 Answer 4 b In response increase in sales by 8% , the net operating income of company will increase by = 8% * 5 = 40% Answer 5 Computation of new operating income Units Per Unit rate Total Sales (20000 units * 120%) 24000 $60 $14,40,000 Less Variable cost $48 $11,52,000 Contribution margin $12 $2,88,000 Less : Fixed expenses $2,10,000 Net operating income $78,000