Question

Ramada Company produces one golf cart model. A partially complete table of company costs follows:

Number of golf carts produced and sold		600		800		1,000
Total costs
Variable costs	$	?	$	464,000	$	?
Fixed costs per year		?		240,000		?
Total costs		?		704,000		?
Cost per unit
Variable cost per unit		?		?		?
Fixed cost per unit		?		?		?
Total cost per unit		?		?		?

Required:
1. Complete the table.

2. Ramada sells its carts for $1,450 each. Prepare a contribution margin income statement for each of the three production levels given in the table.

4. Calculate Ramada’s break-even point in number of units and in sales revenue.

5. Assume Ramada sold 300 carts last year. Without performing any calculations, determine whether Ramada earned a profit last year.

6. Calculate the number of carts that Ramada must sell to earn $21,000 profit.

7. Calculate Ramada’s degree of operating leverage if it sells 850 carts.

8. Using the degree of operating leverage, calculate the change in Ramada’s profit if sales are 15 percent less than expected.

Answer 1

1.

Number of golf carts produced and sold		600		800		1,000
Total costs
Variable costs	$	348,000	$	464,000	$	580,000
Fixed costs per year	$	240,000	$	240,000	$	240,000
Total costs	$	588,000	$	704,000	$	820,000
Cost per unit
Variable cost per unit	$	580	$	580	$	580
Fixed cost per unit	$	400	$	300	$	240
Total cost per unit	$	980	$	880	$	820

2.

Number of golf carts produced and sold		600		800		1,000
Sales revenue	$	870,000	$	1,160,000	$	1,450,000
Variable costs	$	348,000	$	464,000	$	580,000
Contribution Margin	$	522,000	$	696,000	$	870,000
Less: Fixed costs	$	240,000	$	240,000	$	240,000
Income from Operations	$	282,000	$	456,000	$	630,000

4. Contribution Margin ratio = (1,450 - 580) / 1,450 = 60%

Breakeven units	240,000 / 870	276 units
Breakeven sales	240,000 / 60%	$ 400,000

5. Yes
Because 300 units are greater than 276 units (breakeven)

6.

Target units

(21,000 + 240,000) / 870

300 units

7. Degree of Operating leverage = Contribution margin / Income from Operations

Number of golf carts produced and sold		850
Contribution Margin (850 * 870)	$	739,500
Less: Fixed costs	$	240,000
Income from Operations	$	499,500

Degree of Operating leverage

739,500 / 499,500

1.48

8.

Change in Profit = 1.48 * 15 = 22.21%