Question

Part 1

Abe, Inc. has a contribution margin of $60,000 and net income of $20,000.

Zeb, Inc. has a contribution margin of $44,000 and net income of $22,000.

Which of the following statements is false?

Multiple Choice

• Abe’s cost structure has a higher percentage of fixed costs than Zeb’s cost structure.

• Abe’s profits are must sensitive to changes in sales.

• Abe's net income grows one third as fast as its sales

• If sales increase, Abe will experience a greater percentage increase in profit than Zeb.

Part 2

Assume the following (1) variable expenses = $287,000, (2) unit sales = 10,000, (3) the contribution margin ratio = 20%, and (4) net operating income = $10,000. Given these four assumptions, which of the following is true?

Multiple Choice

• The total fixed expenses = $57,400

• The break-even point in sales dollars is $308,750

• The total contribution margin = $229,600

• The total sales = $344,400

Answer 1

Part 1)OPTION C-----Abe's net income grows one third as fast as it sales

Operating Leverage = contribution margin/NET income

For Abe----operating leverage =60000/20000=3

For Zeb----operating leverage =44000/22000=2

High degree of operating leverage means , a small percentage of increase in sales can produce much larger percentage increase in net operating income.

Part 2)OPTION B----- BEP in sales dollar is $308750

Let selling price be X

10000X- 287000=20%*10000X

X=$36.875

Total Sales =10000*35.875=$358750

Sales - variable cost - fixed cost = Net income

358750 -287000 - fixed cost =10000

Fixed cost=$61750

BEP= Fixed cost / Contribution margin ratio =61750/20%=$308750