Question

A company has sales of $250000, contribution margin of $75000 and profit of $45000, with total fixed expenses amount to $30000. Variable expenses are 70% of sales.

1. What is its operating leverage?

2.What is its ratio of break-even sales to his current sales?

3. What is its safety-margin ratio to the target sales?

Answer #1

1. Operating leverage = Contribution margin / Profit = 75000 / 45000 = 1.67

2. Variable expenses = 0.7 * 250000 = $175,000

Contribution margin ratio = 75,000 / 250,000 = 0.3 or 30%

Break-even Sales = Total fixed costs / Contribution margin ratio

= 30,000 / 0.3

= 100,000

Ratio of break-even sales to his current sales = 100,000 / 250,000 = 0.4 or 40%

3. Margin of safety = Actual sales - Break-even Sales = 250,000
- 100,000 = $150,000

Safety-margin ratio to the target sales = 150,000 / 250,000 = 0.6
or 60%

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Per Unit
Sales
$
316,000
$
20
Variable
expenses
221,200
14
Contribution
margin
94,800
$
6
Fixed
expenses
78,000
Net operating
income
$
16,800
Required:
1. What is the monthly break-even point in unit sales and in
dollar sales?
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Break
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2. Without resorting to computations, what is the total
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$
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Variable expenses
38,500
Contribution margin
31,500
Fixed expenses
23,310
Net operating income
$
8,190
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$
75,000
Variable expenses
45,000
Contribution margin
30,000
Fixed expenses
22,800
Net operating income
$
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Total
Per Unit
Sales
$
318,000
$
20
Variable expenses
222,600
14
Contribution margin
95,400
$
6
Fixed expenses
72,600
Net operating income
$
22,800
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The company's operating leverage is closest to _____. (Round-off
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a.14.9
b.13.1
c.12.4
d.14.0
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c.the point where total revenue equals total cost.
d.the point where sales revenues equal variable costs.
3....

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$41.00
Total variable cost
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12.30
Contribution
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