Next year, Rad Shirt Company expects to sell 32,000 shirts. Rad is budgeting the following operating results for next year:
Sales............................................... $800,000
Variable expenses.......................... 288,000
Contribution margin...................... 512,000
Fixed expenses............................... 192,000
Net operating income..................... $320,000
123. What is Rad's margin of safety for next year? A) $480,000 B) $500,000 C) $512,000 D) $608,000
124. What is Rad's degree of operating leverage for next year? A) 1.50 B) 1.56 C) 1.60 D) 2.50
125. How many shirts would Rad have to sell next year in order to generate $480,000 of net operating income? A) 38,400 B) 48,000 C) 60,000 D) 42,000
126. Rad is considering increasing its advertising by $48,000 next year. By how much would sales have to increase in order for Rad to still generate a $320,000 net operating income? A) $48,000 B) $75,000 C) $76,800 D) $120,000
SOLUTION
SOLUTION PREVIEW
Total Percent
of Sales
Sales................................................................
$800,000 100.0%
Variable
expenses............................................ 288,000 36%
Contribution margin and contribution margin ratio..... $512,000
64%
Break-even in
total sales dollars = Fixed expenses/CM ratio
SOLUTION
