Question

The LOLA'S store presents the following information related to your income and costs:

Sales Price .............................. $ 42

Invoice costs ........................... 22

Sales commissions ............... .. 6

Shipping .................................. 4

Advertising ........................... $ 60,000

Rent .................................... .. 30,000

.............................. .. 150,000

5. If management decides to eliminate commissions and increase salaries to $ 230,000, what would be the new BEP.

6. If management decides to increase the price to $ 45, raise the variable costs to $ 36, the fixed costs increase to $ 260,000 in total. This strategy projects to earn $ 300,000. How many units should you sell ?????

7. With the original data, determine the Degree of Operating Leverage in dollars and percent.

Answer 1

	Contribution per unit if commission is removed	14	(42-22-6)
	Fixed cost	320000	(60000+30000+230000)
5	New Breakeven Point   = Fixed cost / Contribution per unit	320000/14
		22857	Units
6	Required Contribution	560000	(260000+300000)
	Contribution margin per unit	9	(45-36)
	Units need to be sold	560000/9
		62222	Units
7	Degree of operating leverage in terms of dollar	Contribution / Operating Income
		5
	Degree of operating leverage in %	Contribution margin % / Operating margin
		0.238095 / 0.047619
		5