Question

Break-Even Units, Contribution Margin Ratio, Multiple-Product Breakeven, Margin of Safety, Degree of Operating Leverage

Jellico Inc.'s projected operating income (based on sales of 450,000 units) for the coming year is as follows:

	Total
Sales	$ 11,700,000
Total variable cost	6,669,000
Contribution margin	$ 5,031,000
Total fixed cost	2,871,024
Operating income	$ 2,159,976

Required:

1(a). Compute variable cost per unit. Enter your answer to the nearest cent.
$per unit

1(b). Compute contribution margin per unit. Enter your answer to the nearest cent.
$per unit

1(c). Compute contribution margin ratio.
%

1(d). Compute break-even point in units.
units

1(e). Compute break-even point in sales dollars.
$

2. How many units must be sold to earn operating income of $371,176?
units

3. Compute the additional operating income that Jellico would earn if sales were $50,000 more than expected.
$

4. For the projected level of sales, compute the margin of safety in units, and then in sales dollars.

Margin of safety in units		units
Margin of safety in sales dollars	$

5. Compute the degree of operating leverage. Round your answer to one decimal place.

6. Compute the new operating income if sales are 10% higher than expected. Enter your answer to the nearest whole dollar.
$

Answer 1

1a) Variable cost per unit = 6669000/450000 = 14.82 per unit

1b) Contribution margin per unit = 5031000/450000 = 11.18 per unit

1c) Contribution margin ratio = 11.18/26 = 43%

1d) Break even unit = 2871024/11.18 = 256800 Units

1e) Break even sales = 256800*26 = $6676800

2) Required unit = (2871024+371176)/11.18 = 290000 Units

3) Additional income = 50000*43% = 21500

4a) Margin of safety units = (450000-256800) = 193200 Units

Margin of safety in sales dollars = 193200*26 = $5023200

5) Degree of operating leverage = Contribution margin/Net income = 5031000/2159976 = 2.3 Times

6) Net income increase percentage = 2.3*10 = 23%

Net operating income = 2159976*1.23 = $2656770