Question

# Risk assessment calculations Baseline information: 40,000 units sold at a unit selling price of \$100, variable...

Risk assessment calculations

Baseline information: 40,000 units sold at a unit selling price of \$100,

variable costs of \$80 per unit, fixed costs of \$750,000

1. Calculate the contribution margin per unit in dollars and as a percentage

2. Prepare a financial report in the contribution margin format

Calculate the breakeven point in dollars and unit sales

4. Prove the validity of the breakeven calculation by preparing a financial

report using the contribution margin format

5. Calculate the performance level in unit sales to earn net income of

\$100,000

6. Prove the validity of the desired net income calculation by preparing a

financial report using the contribution margin format

7. Calculate the degrees of operating leverage

ithout preparing a financial report, calculate the increase in net income

f the number of units sold increased by 10%

9. Prove the validity of the operating leverage calculation by preparing a

financial report using the contribution margin format and assuming a 10%

increase in units sold

What-if calculation

Calculate net income resulting from these changes to the baseline

information: units sold and selling price remained the same, variable costs

were increased by \$10, and fixed costs were decreased by \$250,000

SOLUTION

1. Contribution margin per unit = Sales price - Variable costs

= \$100 - \$80 = \$20

Contribution margin ratio = Contribution margin per unit / Sales price * 100

= \$20 / \$100 * 100 = 20%

2. Contribution margin format

 Particulars Amount (\$) Sales price (40,000*\$100) 4,000,000 Variable cost (40,000*\$80) 3,200,000 Contribution margin 800,000 Fixed Expenses 750,000 Net Operating Income 50,000

Breakeven point in sales units = Fixed expense / Contribution margin per unit

= \$750,000 / \$20 = 37,500 units

Breakeven point in dollars = Fixed expense / Contribution margin ratio

= \$750,000 / 20% = \$3,750,000

4. Contribution margin format

 Particulars Amount (\$) Sales price (37,500*\$100) 3,750,000 Variable cost (37,500*\$80) 3,000,000 Contribution margin 750,000 Fixed Expenses 750,000 Net Operating Income 0

5. Performance level in unit sales = (Fixed cost + Desired profit) / Contribution margin per unit

= (\$750,000 + \$100,000) / \$20

= \$850,000 / \$20

= 42,500 units

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