Question

1st question part 3

The Foundational 15 [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6, LO5-7, LO5-8]

[The following information applies to the questions displayed below.]

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Sales	$	80,000
Variable expenses		52,000
Contribution margin		28,000
Fixed expenses		21,840
Net operating income	$	6,160

9. What is the break-even point in dollar sales?

10. How many units must be sold to achieve a target profit of $16,800?

11. What is the margin of safety in dollars? What is the margin of safety percentage?

12. What is the degree of operating leverage?

Answer 1

9. Contribution margin ratio = Contribution margin / Sales

= $28,000 / $80,000

= 0.35

Break-even point in dollar sales = Fixed expenses / Contribution margin ratio

= $21,840 / 0.35

= $62,400

10. Contribution margin per unit = $28,000 / 1,000 = $28

Units to be sold = (Fixed expenses + Desired profit) / Contribution margin per unit

= ($21,840 + $16,800) / $28

= 1,380

11. Margin of safety in dollar sales = Sales - Break even sales

= $80,000 - $62,400

= $17,600

Margin of safety percentage = Margin of safety / Sales * 100

= $17,600 / $80,000 * 100

= 22%

12. Degree of operating leverage = Contribution margin / Net operating income

= $28,000 / $6,160

= 4.55 times (rounded to nearest cent)