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	8,190,000
Contribution margin	$3,510,000
Total fixed cost	2,254,200
Operating income	$1,255,800

Required:

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

1(b). Compute contribution margin per unit. Round 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 $296,400?
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.
$

Feedback

1.
a. Divide variable cost by units.
b. Divide contribution margin by units.
c. Divide contribution margin by sales.
d. Divide fixed cost by unit contribution margin.
e. Divide fixed cost by contribution margin ratio.

3. Multiply expected sales by contribution margin ratio.

4. Compute the difference between expected sales units and break-even sales units. Compute the difference between expected sales and break-even sales.

Answer 1

1) Variable cost per unit = 8190000/450000 = 18.20 per unit

1b) Contribution margin per unit = 3510000/450000 = 7.80 per unit

1c) Contribution margin ratio = 7.8/26 = 30%

1d) Break even unit = 2254200/7.8 = 289000 Units

1e) Break even sales = 289000*26 = $7514000

2) Required unit = (2254200+296400)/7.8 = 327000 Units

3) Net income increase by = 50000*30% = $15000

4) Margin of safety in Units = 450000-327000 = 123000 Units

Margin of safety ($) = 123000*26 = $3198000

5) Degree of operating leverage = 3510000/1255800 = 2.8

6) Net income increase by (10*2.8) = 28%

Net income = 1255800*1.28 = $1607424