Question

Smith Company manufactures fish tanks. One of the fish tanks that the company produces is a 2.6 gallon fish tank that the conpany sells foe $37.50. The fish tanks are manufactured in an outdated fish tank manufacturing facility that is labor intense, relying heavily on direct labor workers. Variable costs are high, totaling $22.50 per 2.6 gallon fish tank of whick 60% is direct labor cost. Last year the company sold 40,000 2.6 gallon fish tanks and had $480,000 in fixed expense associated with the 2.6 gallon fish tank. Compute the contribution margin ratio, break-even in number of 2.6 gallon fish tanks, and the degree of operating leverage at last year's level of sales.

Answer 1

Answer

--All working forms part of the answer

A	Sale price per unit	$37.50
B	Variable cost per unit	$22.50
C = A - B	Contribution margin per unit	$15.00
D = (C/A) x 100	Contribution margin ratio	40%	Answer #1
E	Fixed Cost	$480,000
F = E/C	Break even point in numbers	32000	Answer #2
G	Actual unit sales	40000
H = G x C	Total Contribution margin	$600,000
I = H - E	Operating Income	$120,000
J = H/I	Degree of Operating Leverage	5	Answer #3