Cost Volume Profit Analysis Ronald Company manufactures and sells a specialized
ID: 2587596 • Letter: C
Question
Cost Volume Profit Analysis Ronald Company manufactures 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: Total Per Unit $60 $900,000 S45 $15 Sales (20,000 units)$1,200,000 Variable expenses Contributiton margin Fixed expenses Net operating income $300,000 $240,000 $60,000 Required 1. 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 S3 per unit, but management could eliminate one quality inspector who is paid a salary of S30,000 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 incomeExplanation / Answer
1 Break even point in units=Fixed cost/Contribution per unit=240000/15=16000 Break even point in $=Fixed cost/Contribution margin ratio Contribution margin ratio=Contribution/Sales=15/60=0.25 Break even point in $=24000/0.25=$960000 2 Units to meet desired profit=(Fixed cost+Desired profit)/Contribution per unit=(240000+90000)/15=22000 units 3 Margin of safety=Actual sales-Brek even point sales $=1200000-960000=$240000 Margin of safety in %=(Actual sales-Brek even point sales $)/Actual sales=$240000/1200000=20% 4 a. Degree of Operating leverage=Contribution margin /Net income=300000/60000=5 b. Degree of operating leverege=5 Increase in sales=8% Increase in operating income=Operating leverage*Increase in sales=5*8%=40% 5 Total Per unit Sales (20000*120%=24000 units) 1440000 60 Variable expenses (24000*48) 1152000 48 Contribution margin 288000 12 Fixed expenses (240000-30000) 210000 Net operating income 78000