Question

Hello! I'm working on the problem but not sure if I'm going in the right direction. Please help.

Over the last few years, Jennifer Petersen sold crafts at the annual county fair. Using the sales and cost information from the most recent fair, Jennifer developed the following worksheet:

Jennifer Crafts
Pre-tax Profit County Fair
For fye 20x0
Sales	$16,000
Cost of crafts sold	8,800
Gross margin	7,200
Other costs and expenses:
Fair registration cost	1,200
Fair booth rental expense	750
Salary to support staff	400
Operating profit	$4,850

For the upcoming 20x1 fair, Ms. Petersen expects a 25% increase in total sales by selling more products. So, using the results from above, she forecasts operating profit from the 20x1 county fair as follows:

County Fair forecasted operating profit for 20x1
Operating profit 20x0	$4,850
Sales in 20x0	$16,000
Operating profit as a % of sales	30.3125%
Forecasted sales for 20x1	$20,000
Forecasted operating profit 20x1	$6,063

Required

Ms. Petersen has never had an Acct 203 course and isn’t comfortable with her 20x1 profit forecast shown above. So, she’s hired you to review her work. In reviewing Ms. Petersen’s analysis, perform the following steps:

1. Using the Jennifer Crafts income statement for 20x0, prepare a Contribution Margin Income Statement. For that statement, assume the following:
   1. Cost of crafts sold and fair booth rental cost are variable costs;
   2. Fair registration cost and salaries to support staff are fixed costs.
2. Prepare a separate forecast of Jennifer Crafts operating profit for 20x1, using Ms. Petersen’s sales forecast. Put your schedule in the “Contribution Margin” Income Statement format assuming the costs and expenses are variable and fixed as described in 1. above.

3. Does your forecasted 20x1 operating profit match Ms. Petersen’s? If not, explain to Ms. Petersen why your forecasted operating profit differs from her forecasted amount.

4. Using the information from part 1., Ms. Petersen asks that you provide her with an estimate of the amount of sales she would have to generate in order to achieve an Operating Profit = $10,000.

My solution:

1.

Sales revenues		$16,000.00
Variable cost
Cost of crafts sold	$8,800.00
fair booth rental cost	$750.00	$9,550.00
Contribution margin		$6,450.00
Fixed costs
Fair registration cost	$1,200.00
salaries to support staff	$400.00	$1,600.00
Net income		$4,850.00

2.

Sales revenues		$20,000
Variable cost
Cost of crafts sold	$8,800.00
fair booth rental cost	$750.00	$9,550.00
Contribution margin		$10,450
Fixed costs
Fair registration cost	$1,200.00
salaries to support staff	$400.00	$1,600.00
Net income		$8,850

4.

Operating leverage for 20x0 = Contribution margin/Profit = $6,450/$4,850 = 1.33 or 133%

Operating leverage for 20x1 = $10,450/$8,850 = 1,18 or 118%

Answer 1