Question

Bradjoli Inc. produces a single product. The results of operations for a typical month are as follows:

Sales revenue $540,000 Variable expenses 360,000 Contribution margin 180,000 Fixed costs 100,000 Operating income $ 80,000

The company produced and sold 120,000 kgs of product during the month, and there were no beginning or ending inventories. Bradjoli pays income tax at a rate of 25%.

Required: a) At the typical sales volume, calculate: 3 i) the breakeven point is units sold and in sales dollars. 2 ii) the margin of safety as a percentage. 3 iii) the operating leverage. Using the operating leverage, determine the operating profit that Bradjoli would report if sales were to increase 40%. 4 b) Compute the target sales in units and sales dollars if Bradjoli wants to earn an after-tax profit of $162,000. 1 i) At this sales volume, what is the operating leverage? 1 ii) At this sales volume, determine the operating profit that Bradjoli would report if sales were to increase 40%. 4 c) Using the typical month’s operating results as the starting point, calculate the breakeven point if Bradjoli plans to invest in automation with a monthly fixed cost of $25,000 and expects this will reduce variable expenses by $0.50 per unit. Do you recommend the company undertake this investment? Why or why not?

Answer 1

	Total	Units	Per Unit
Sales	540000	120000	4.50
Less : Variable Expenses	360000	120000	3.00
Contribution	180000		1.50

Q.3(i)

Breakeven Points in units = Fixed Cost / Contribution per unit

= 100000 / 1.50

= 66,667 units

Breakeven Points in sales volume = 66667 * 4.50 = $300,000

Q.2(ii)

Margin of safety = (Current sales level - Breakeven Point) / Current Sales Level * 100

= (540000 - 300000) / 540000 * 100

= 44.44%

Q.3(iii)

Operating Leverage = Fixed Cost / Total Cost

= 100000 / 360000+100000

= 0.22

Q4.b

Target profit after tax profit	162000
Add: Tax	54000
Profit before tax	216000
Add: Fixed Cost	100000
Total Required Contribution	316000
Contribution per unit	1.50
Target sales unit (316000/1.50)	210666.66
Target Sales Value (210667 * 4.50)	$948,000