Question

Problem 2-20 Points: The CGC Computer Products most recent contribution margin income statement is shown on the worksheet. In each of the following scenarios, calculate the values indicated. (CALCULATE ALL CHANGES FROM THE BEGINNING SCENARO OF NUMBERS-hint: it may be easier to copy the base income statement and paste to all other scenarios) A. The breakeven point in dollars and units. B. The sales volume increases by 30% and the price decreases by $0.50 per unit. c. The selling price decreases $2.00 per unit, fixed expenses increase by $420,000, and the sales volume increases by 400%. D. The selling price increases by 60%, variable expense increases by $1.75 per unit, and the sales volume decreases by 40%. E. The selling price increases by $4.50 per unit, variable cost increases by $3.10 per unit, fixed expenses increase by $39,680, and sales volume decreases by 22% Calculate the Margin of Safety and Degree of Operating Leverage for all scenarios.

Answer 1

Break-even point is the sales volume at which revenue equals costs (i.e no profit no loss)

Margin of safety is the excess of actual sales revenue over the break-even sales revenue.

A)- Determination the break-even point in dollars and units

Break Even Point(BEP) in Units = Fixed Cost/(Sales value per unit - variable cost per unit)

Where Fixed Cost = 100000

Selling price per unit = $ 15

variable cost per unit = $ 10

So BEP = 100000/(15-10)

= 20000 Units

BEP in $ = BEP Units * Sales value per unit

= 20000*15

= $ 300000

B)- Sales volume increased by 30% and the sales price decreases by $ 0.50 per unit
	Total	Per Unit	Volume-Units
Sales volume (40000*1.30), sales price (15-0.50)	754000	14.5	52000
variable expenses	520000	10
contribution margin	234000	4.5
Fixed Expenses	100000
Net Operating inocme	134000
margin of safety in units = Actual sales revenue - BEP revenue		29777.78
Degree of operating leverage = contribution / EBIT		1.75

Note - BEP (in units) = 100000/(14.5-10)

= 100000/4.5

= 22222.22 units

C)- Selling price decreases by $ 2.00 per unit, fixed expenses increase by $ 420000 and the sales volume increase by 400%
	Total	Per Unit	Volume-Units
Sales volume (40000+ 40000*4.00), sales price (15-2)	2600000	13	200000
variable expenses	2000000	10
contribution margin	600000	3
Fixed Expenses (100000+420000)	520000
Net Operating inocme	80000
margin of safety in units = Actual sales revenue - BEP revenue		26666.66
Degree of operating leverage = contribution / EBIT		7.50

Note - BEP = 520000/(13-10)

= 520000/3

= 173333.3 units

Actual sales in unit = 200000 units

D)- Selling price increses by 60%, variable expense increases by $1.75 unit sales volume decreases by 40%
	Total	Per Unit	Volume-Units
Sales volume (40000*(1-0.40)), sales price (15*1.60)	576000	24	24000
variable expenses (10+1.75)	282000	11.75
contribution margin	294000	12.25
Fixed Expenses	100000
Net Operating inocme	194000
margin of safety in units = Actual sales revenue - BEP revenue		15836.73
Degree of operating leverage = contribution / EBIT		1.52

Note - BEP in units = 100000/(24-11.75)

= 100000/12.25

= 8163.265

Actual sales = 40000*0.60

= 24000 units

E)- Selling price increses by $ 4.50 per unit, variable cost increases by $3.10 unit fixed expenses increases by $ 39680, & sales volume decreases by 22%
	Total	Per Unit	Volume-Units
Sales volume (40000*(1-0.22)), sales price (15+4.50)	608400	19.5	31200
variable expenses (10+3.10)	408720	13.1
contribution margin	199680	6.4
Fixed Expenses (100000+39680)	139680
Net Operating inocme	60000
margin of safety in units = Actual sales revenue - BEP revenue		9375.00
Degree of operating leverage = contribution / EBIT		3.33

Note - BEP(units) = 139680/(19.5-13.1)

= 139680/6.4

= 21825 unit

margin of safety = actual sales units - BEP units

= 31200-21825

= 9375 units

Please check with your answer and let me know.