Question

Break-Even Units, Contribution Margin Ratio, Multiple-Product Breakeven, Margin of Safety, Degree of Operating Leverage

Jellico Inc.'s projected operating income (based on sales of 450,000 units) for the coming year is as follows:

	Total
Sales	$ 11,700,000
Total variable cost	7,371,000
Contribution margin	$ 4,329,000
Total fixed cost	2,705,144
Operating income	$ 1,623,856

1(a). Compute variable cost per unit. Enter your answer to the nearest cent.
$per unit

1(b). Compute contribution margin per unit. Enter your answer to the nearest cent.
$per unit

1(c). Compute contribution margin ratio.
%

1(d). Compute break-even point in units.
units

1(e). Compute break-even point in sales dollars.
$

2. How many units must be sold to earn operating income of $354,016?
units

3. Compute the additional operating income that Jellico would earn if sales were $50,000 more than expected.
$

4. For the projected level of sales, compute the margin of safety in units, and then in sales dollars.

Margin of safety in units		units
Margin of safety in sales dollars	$

5. Compute the degree of operating leverage. Round your answer to one decimal place.

6. Compute the new operating income if sales are 10% higher than expected. Enter your answer to the nearest cent.
$

Answer 1

1a) variable cost per unit = 7371000/450000 = 16.38

1b) Contribution margin per unit = 4329000/450000 = 9.62

1c) Contribution margin ratio = 9.62/26 = 37%

1d) Break even unit = 2705144/9.62 = 281200 Units

1e) Break even sales = 281200*26 = $7311200

2) Desired unit = (354016+2705144)/9.62 = 318000 Units

3) Additional operating income = 50000*37% = 18500

4) Margin of safety in units = 450000-281200 = 168800 Units

5) Degree of operating leverage = 4329000/1623856 = 2.7

6) New operating income = 1623856*1.27 = 2062297.12

Margin of safety sales = 168800*26 = $4388800

5)