Module+5000+example+Review+Problem

---Roll Tide T-Shirts, Inc.- -Contribution Margin Based Income Statement- ---For Coming Year ---Total-Per unit- Less: Variable expenses Contribution Margin Less: Fixed expenses Operating income ||> $750.000 __$300,000__ $450,000 __$100,000__ $350,000 ||> $15 __$8__ $7 ||
 * Sales

Calculate the following: a) Per unit break even point b) For a target profit of $500,000, how many units must be produced? c) What is the contribution margin ratio? Use this to compute the profit if sales were $50,000 higher than expected. d) How many units must be sold to create an operating income equal to 15 percent of sales? Create an income statement to reflect. e) What is the margin of safety for the original projected sales of 50,000? f) What is the degree of operating leverage for the original projected sales? g) Using the degree of operating leverage, compute the percent change in profit is sales increase 10 percent.

Calculations:

a) Units = Fixed costs/(Price - Unit Variable cost) = $100,000/($15-$8) = 14,286

b) Units = ($100,000 + $500,000)/$7 = 85,714

c) Contribution margin ration = Contribution margin / Price = $7/$15 =46.66% Sales of $50,000 would yield a profit of $23,333 (0.4666 X $50,000)

d) Operating income = (Price X Units) - (Unit Variable cost X units) - Fixed costs (.15)($15) Units = ($15 X Units) - ($8 X Units) - $100,000 $4.75 Units = $100,000 Units = 21,053 Income statement: Variable expense (21,053 X $8) Contribution Margin Fixed Expenses Operating income ||> $315,795 __168424__ $147,371 __$100,000__ __$47,371__ ||
 * Sales (21,053X $15)

e) 15,000 - 7,000 = 8,000 units

f)Degree of operating leverage = $450,000 / $350,000 = 1.29

d) Percent change in profit = 10% X 1.29 = 12.9%