Stratford Company distributes a lightweight lawn chair that sells for $20 per un
ID: 2510649 • Letter: S
Question
Stratford Company distributes a lightweight lawn chair that sells for $20 per unit. Variable expenses are $8 per unit, and fixed expenses total $330,000 annually Required: Answer the following independent questions: 1. What is the product's CM ratio? tribution margin 96 2. Use the CM ratio to determine the break-even point in sales dollars. Break-even point in sales dollars 3. The company estimates that sales will inarease by S70,000 during the coming year due to increased demand. By how much should net operating income increase? in operating 4. Assume that the operating results for last year were as follows: Sales S 660,000 Less: Variable expenses 284,000 Contribution margin 398,000 Less: Fixed expenses 330,000 Net operating income S 68,000 a. Compute the degree of operating leverage at the current level of sales. (Round your answer to 1 decimal place.) Degree of operating I b. The president expects sales to increase by 20% next year. By how much should net operating income increase? n operatingExplanation / Answer
1) Contribution margin ratio contribution/sales (20-8)/20 60.00% 2) BEP(dollars) = fixed expense/contribution margin ratio 330,000/60% 550000 3) increase in net operating income 42000 (70,000*60%) 4)a) degree of operating leverage contribution/net income 396000/66000 6 4b) increase in operating income 79200 (66000*120%) 5-a) new units = 35000*140%= 49000 new selling price = 20*90%= 18 new fixed cost = 330,000+138000= 468000 New contribution margin = 18-8 = 10 last year proposed total pu total pu Sales 700000 20 882000 18 variable expense 280000 8 392000 8 Contribution margin 420000 12 490000 10 fixed expense 330,000 468000 net operating income 90,000 22000 5-b) N0 6) units = 70,000 units variable expense = 8+3 = $11 new contribution = 20-11= $9 profit at 35000 units = 90000 (70000*9) = 330,000+x+90,000 630,000 = 420,000 +x x 630000-420000 x = 210000