P5–21
Basic CVP Analysis [LO1, LO3, LO4, LO6, LO8]
Stratford
Company distributes a lightweight lawn chair that sells for $15 per unit.
Variable expenses are $6 per unit, and fixed expenses total $180,000 annually.
Required:
Answer the following independent questions:
1.
What is the product’s CM ratio?
2.
Use the CM ratio to determine the break-even point in sales dollars. Show
Check Figure
Break-even:
$300,000
3. The
company estimates that sales will increase by $45,000 during the coming year
due to increased demand. By how much should net operating income increase?
4. Assume
that the operating results for last year were as follows:
Sales
$360,000
Variable
expenses 144,000
Contribution
margin 216,000
Fixed
expenses 180,000
Net
operating income $36,000
a. Compute
the degree of operating leverage at the current level of sales.
b. The
president expects sales to increase by 15% next year. By how much should net
operating income increase?
5.
Refer to the original data. Assume that the company sold 28,000 units last
year. The sales manager is convinced that a 10% reduction in the selling price,
combined with a $70,000 increase in advertising expenditures, would increase
annual unit sales by 50%. Prepare two contribution format income statements,
one showing the results of last year’s operations and one showing what the
results of operations would be if these changes were made. Would you recommend
that the company do as the sales manager suggests?
6.
Refer to the original data. Assume again that the company sold 28,000 units
last year. The president feels that it would be unwise to change the selling
price. Instead, he wants to increase the sales commission by $2 per unit. He
thinks that this move, combined with some increase in advertising, would double
annual unit sales. By how much could advertising be increased with profits
remaining unchanged? Do not prepare an income statement; use the incremental
analysis approach.
TUTORIAL
PREVIEW
|
1.
|
CM
ratio
|
Dollars
|
Ratio
|
|
|
Sales price
|
$ 15
|
100%
|
|
|
Variable
expenses
|
6
|
40%
|
|
|
Contribution
margin
|
$ 9
|
60%
|
|
|
|
Correct!
|
Correct!
|
