Exercise : Target Profit, Margin of Safety, Operating Leverage, Contribution Margin,and Gross Margin
The following budget data apply to Newberry's Nutrition:
Sales (100,000 units) $1,000,000
Costs
Direct materials $300,000
Direct labor $200,000
Fixed factory overhead $100,000
Variable factory overhead $150,000
Marketing and administration $160,000
Total costs $910,000
Budgeted pre-tax income $90,000
Direct labour workers are paid hourly wages and go home when there is no work.
The marketingand administration costs include $50,000 that varies proportionately with production volume.Assume that sales and production volumes are equal.
A. Compute the number of units that must be sold to achieve a target after-tax incomeof $120,000, assuming a tax rate of 40%.
B. Calculate the margin of safety in both revenues and units.
C. Calculate the degree of operating leverage.
D. Prepare Newberry's Nutrition income statements in contribution margin format and grossmargin format