Break-Even in Units, Target Income, New Unit Variable Cost, Degree of Operating Leverage, Percent Change in Operating Income
Reagan, Inc., has developed a chew-proof dog bed—the Tuff-Pup. Fixed costs are $224,000 per year. The average price for the Tuff-Pup is $37, and the average variable cost is $23 per unit. Currently, Reagan produces and sells 20,000 Tuff-Pups annually.
Required:
1. How many Tuff-Pups must be sold to break
even?
units
2. If Reagan wants to earn $79,800 in profit,
how many Tuff-Pups must be sold?
units
Prepare a variable-costing income statement to verify your answer.
Reagan, Inc. | |
Variable-Costing Income Statement | |
Sales | $ |
Less: Variable cost | |
Contribution margin | $ |
Less: Fixed expenses | |
Operating income | $ |
Feedback
Remember a contribution margin income statement calculates contribution-margin not gross profit.
3. Suppose that Reagan would like to lower the
break-even units to 11,200. The company does not believe that the
price or fixed cost can be changed. Calculate the new unit variable
cost that would result in break-even units of 11,200. If required,
round your intermediate computations and final answer to the
nearest cent.
$
4. What is Reagan’s current contribution margin and operating income?
Current contribution margin | $ |
Current operating income | $ |
Calculate the degree of operating leverage. Round your answer to three decimal places.
If sales increased by 10 percent next year, what would the
percent change in operating income be? Use your rounded answer to
the question above in your computations, and round your final
percentage answer to two decimal places (for example, 45.555% would
be entered as "45.56").
%
What would the new total operating income for next year be? Round your answer to the nearest dollar
1) Break even point = 224000/(37-23) = 16000 Units
2) Required unit = (224000+79800)/(37-23) = 21700 Units
Sales | 802900 |
Variable cost | 499100 |
Contribtution margin | 303800 |
Fixed cost | 224000 |
Net operting income | 79800 |
3) 11200 = 224000/(37-X)
414400-11200X = 224000
-11200X = 224000-414400
-11200 = -190400
X(variable cost per unit ) = 17
4) Current contribution margin = 14*20000 = 280000
Current operating income = 280000-224000 = 56000
Degree of operating leverage = 280000/56000 = 5 Times
Net operating incoome increase by = 5*10 = 50%
New total operating income = 56000*1.5 = 84000
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