Question

Skaters, Inc. plans to sell 90,000 skateboards next quarter at a price of $36 per unit. Production costs are $14.40 per unit. Selling and administrative expenses are: variable, $7.20 per unit; and fixed, $604,800 per quarter. What are the budgeted earnings for next quarter? (Do not consider federal income taxes.)

Show the analysis in a table format. Write a one-paragraph interpretation of the information presented in the table.

Answer 1

1)		Total	Per Unit
	Sales (90000*$36)	3240000	36.00
	Variable expenses:
	Prodution costs (90000*$14.40)	1296000	14.40
	Variable selling and administrative expenses (90000*$7.20)	648000	7.20
	Total variable expense	1944000	21.60
	Contribution margin	1296000	14.40
	Less: Fixed selling and administrative expenses	604800
	Net operating income	691200
2)	The contribution margin ratio (assuming production costs are variable) is 14.40/36.00 =
	40%. The firm will break even when it sells 42000 skate boards (604800/14.40). The
	BEP in sales dollars will be 42000*36 = $1,512,000.
	The margin of safety is 53.33% [(90000-42000)/90000].
	The operating leverage = 1296000/691200 = 1.88