Question

1. Professor O’Brien realized his dream and opened O’Brien Vineyards. At this point, he only produces a Pinot Noir but hopes to add a new wine next year. Since he has been focused on wine making, he has not been able to keep up with the managerial accounting responsibilities. Can you help him? Here is the info you’ll need:
O’Brien Vineyards contribution format income statement for September.
Sales
504,000
Variable Expenses
215,525
Fixed Expenses
91,250
Net Operating Income
197,225
O’Brien Vineyards has no beginning or ending inventories. The company produced and sold 21,000 bottles last month. Price per bottle is $24.00.
(each worth 1 point)

e. What is O’Brien Vineyards break-even sales in units?
f. How many units would O’Brien Vineyards have to sell to attain target profits of $167,000?
g. How many sales dollars would O’Brien Vineyards have to generate to attain target profits of $167,000?
h. What is O’Brien Vineyards margin of safety in dollars?
i. What is O’Brien Vineyards margin of safety in units?
j. What is O’Brien Vineyards degree of operating leverage?
k. Based on the degree of operating leverage calculated in “j” above, if sales increased by 12%, what would be the expected increase in net operating income?

Answer 1

Sales	504,000
Variable Expenses	215,525
Contribution Margin	288,475
Fixed Expenses	91,250
Net Operating income	197,225

e.Break Even Sales in Unit = Fixed Costs/Contribution Margin per Unit

Contribution Margin per Unit = 288,475/21,000 = 13.74

Break even point = 91,250/13.74 = 6,642 bottles

f. Target Profit = $167,000

Fixed Costs = $91,250

Target Contribution Margin = $258,250

Contribution Margin per Unit = $13.74

Number of Units required to be sold = 258,250/13.74

= 18,796 units

g. Sales Dollars = 18,796*24 = $451,104

h. Margin of Safety = Sales – Break Even Sales in Dollars

= 504,000 – 6,642*24

= $344,592

i.Margin Of Safety in Units = 21,000 – 6,642 = 14,358 units

j.Degree of Operating Leverage = Contribution margin/Operating Income

= 288,475/197,225

1.46

k.Sales increase by 15%, Net Operating Income will increase by 15%*1.46

= 21.9%