Question

Dana’s Ribbon World makes award rosettes. Following is information about the company: Variable cost per rosette...

Dana’s Ribbon World makes award rosettes. Following is information about the company:

Variable cost per rosette $ 2.60
Sales price per rosette 5.00
Total fixed costs per month 4800.00

Required:

1. Suppose Dana’s would like to generate a profit of $1,080. Determine how many rosettes it must sell to achieve this target profit.

2. If Dana’s sells 2,100 rosettes, compute its margin of safety in units, in sales dollars, and as a percentage of sales.

3. Calculate Dana’s degree of operating leverage if it sells 2,100 rosettes.

4a. Using the degree of operating leverage, calculate the change in Dana’s profit if unit sales drop to 1,848 units.

4b. Prepare a new contribution margin income statement to verify change in dana's profit.

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Answer #1

>> CM per unit = $ 5 - $ 2.6 = $ 2.4.

( 1 ) Target sales units = ( Fixed cost + Desired profit ) / CM per unit

( 1 ) Target sales units = ( $ 4800 + $ 1080 ) / $ 2.4

( 1 ) Target sales units = 2450 units.

>> Break even units = Fixed cost / CM per unit

>> Break even units = $ 4800 / $ 2.4

>> Break even units = 2000.

>> Margin of safety in units = 2100 - 2000 = 100

>> Margin of safety in dollars = 100 * $ 5 = $ 500.

>> Margin of safe percentage = $ 500 / ( 2100 * 5 ) = 4.762 %.

>> Degree of operating leverage = Contribution margin / profit

>> Degree of operating leverage = ( 2100 * $ 2.4 ) / ( 100 * $ 2.4 )

>> Degree of operating leverage = 21

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