A. Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage
Head-First Company had planned to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is $100,500. The degree of operating leverage is 1.5. Now Head-First expects to increase sales by 10% next year.
Unless otherwise instructed, round all total dollar figures (e.g., sales, total contribution margin) to the nearest dollar, breakeven or target units to the nearest unit, and unit costs and unit contribution margins to the nearest cent. Round ratios to four significant digits.
Required:
1. Calculate the percent change in operating income expected.
2. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.
B. Price, Variable Cost per Unit, Contribution Margin, Contribution Margin Ratio, Fixed Expense
For each of the following independent situations, calculate the amount(s) required.
Unless otherwise instructed, round all total dollar figures (e.g., sales, total contribution margin) to the nearest dollar, breakeven or target units to the nearest unit, and unit costs and unit contribution margins to the nearest cent. Round ratios to four significant digits.
Required:
1. At the break-even point, Jefferson Company sells 115,000 units and has fixed cost of $349,600. The variable cost per unit is $4.56. What price does Jefferson charge per unit? Round your answer to the nearest cent.
2. Sooner Industries charges a price of $120 and has fixed cost of $458,000. Next year, Sooner expects to sell 15,600 units and make operating income of $166,000. What is the variable cost per unit? What is the contribution margin ratio? Enter the contribution margin ratio as a percentage, rounded to two decimal places.
3. Last year, Jasper Company earned operating income of $22,500 with a contribution margin ratio of 0.25. Actual revenue was $235,000. Calculate the total fixed cost.
4. Laramie Company has variable cost ratio of 0.56. The fixed cost is $103,840 and 23,600 units are sold at breakeven. What is the price? What is the variable cost per unit? The contribution margin per unit? (Round answers to the nearest cent.)
C. Units Sold to Break Even, Unit Variable Cost, Unit Manufacturing Cost, Units to Earn Target Income
Werner Company produces and sells disposable foil baking pans to retailers for $2.75 per pan. The variable cost per pan is as follows:
| Direct materials |
$0.37 |
| Direct labor |
0.63 |
| Variable factory overhead |
0.53 |
| Variable selling expense |
0.12 |
Fixed manufacturing cost totals $111,425 per year. Administrative cost (all fixed) totals $48,350.
Unless otherwise instructed, round all total dollar figures (e.g., sales, total contribution margin) to the nearest dollar, breakeven or target units to the nearest unit, and unit costs and unit contribution margins to the nearest cent. Round ratios to four significant digits.
Required:
1. Compute the number of pans that must be sold for Werner to break even.
2. Conceptual Connection: What is the unit variable cost? What is the unit variable manufacturing cost? Round your answers to the nearest cent.
Which is used in cost-volume-profit analysis?
3. How many pans must be sold for Werner to earn operating income of $13,530?
4. How much sales revenue must Werner have to earn operating income of $13,530?
D. Multiple-Product Breakeven
Cherry Blossom Products Inc. produces and sells yoga-training products: how-to DVDs and a basic equipment set (blocks, strap, and small pillows). Last year, Cherry Blossom Products sold 13,500 DVDs and 4,500 equipment sets. Information on the two products is as follows:
| Price |
$8 |
$25 |
| Variable cost per unit |
4 |
15
|
Total fixed cost is $84,920.
Required:
1. What is the sales mix of DVDs and equipment sets?
2. Compute the break-even quantity of each product.