Question

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

Variable cost per rosette	$	1.20
Sales price per rosette		3.00
Total fixed costs per month		3600.00

Required:
1. Suppose Dana’s would like to generate a profit of $860. Determine how many rosettes it must sell to achieve this target profit. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)



2. If Dana’s sells 2,450 rosettes, compute its margin of safety in units, in sales dollars, and as a percentage of sales. (Round your Margin of Safety percentage to two decimal places (i.e. .1234 should be entered as 12.34%).



3. Calculate Dana’s degree of operating leverage if it sells 2,450 rosettes. (Round your intermediate calculations to 2 decimal places and final answer to 4 decimal places.)



4. Using the degree of operating leverage, calculate the change in Dana’s profit if unit sales drop to 2,205 units. Confirm this by preparing a new contribution margin income statement. (Round your intermediate calculations to 4 decimal places and final answer to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))

Answer 1

1) Required sales unit = (3600+860)/(3-1.20) = 2478 Rosettes

2) Break even point = 3600/1.8 = 2000 Units

Margin of safety = 2450-2000 = 450 rosettes

Margin of safety dollars = 450*3 = 1350

Margin of safety percentage of sales = 1350*100/7350 = 18.37%

3) Contribution margin on 2450 rosettes = 2450*1.8 = 4410

Net operating income on 2450 rosettes = 4410-3600 = 810

Degree of operating leverage = 4410/810 = 5.4444 Times

4) Sales decrease by (2450-2205)/2450 = 10%

So net operating profit decrease by 5.4444*10% = 54.44%

Contribution margin income statement :

Sales (2205*3)	6615
Variable cost (2205*1.2)	2646
Contribution margin	3969
Fixed cost	3600
Net operating income	369