Question

The PowerClean Company manufactures an engine for carpet cleaners called the "Snooper." Budgeted cost and revenue data for the "Snooper" are given below, based on sales of 40,000 units. Sales revenue Less: Cost of goods sold Gross margin Less: Operating expenses Income $1,600,000 1,120,000 $480,000 100,000 $380,000 Cost of goods sold consists of $810,000 of variable costs and $310,000 of fixed costs. Operating expenses consist of $30,000 of variable costs and $70,000 of fixed costs. Required: A. Calculate the contribution margin and the contribution margin ratio. B. Calculate the break-even point in units and sales dollars. C. Calculate the safety margin (in dollars) D. Calculate the degree of operating leverage, and use it to calculate the percent increase in income that would result from a 20% increase in sales. E. PowerClean received an order for 6,000 units at a price of $25.00. There will be no increase in fixed costs, but variable costs will be reduced by $0.54 per unit because of cheaper packaging. Determine the projected increase or decrease in profit from the order, assuming there are no opportunity costs.

Please show all calculations.

Answer 1

a.

Contribution margin = Sales - Variable cost

Variable cost = Variable cost of goods sold + Variable Operating expenses

= $810,000 + $30,000

= $840,000

Contribution margin = $1,600,000 - $840,000

= $760,000

Contribution margin ratio = Contribution margin / Sales

= $760,000 / $1,600,000

= 47.50%

b.

Break even point in units = Fixed cost / Contribution margin per unit

Fixed cost = Fixed cost of goods sold + Fixed operating expenses

= $310,000 + $70,000

= $380,000

Contribution margin per unit = $760,000 / 40,000

= $19

Break even point in units = $380,000 / $19

= 20,000 units

Break even in sales dollars = Fixed cost / Contribution margin ratio

= $380,000 / 47.5%

= $800,000

c.

Safety margin (in dollars) = Actual sales - Break even sales in dollars

= $1,600,000 - $800,000

= $800,000

d.

Degree of operating leverage = Contribution margin / Operating income

= $760,000 / $380,000

= 2

Percent increase in income = Percentage Increase in sales * Degree of operating leverage

= 20% * 2

= 40%

e.

Variable cost per unit = Variable cost / Units

= $840,000 / 40,000 units

= $21

New variable cost = $21 - $0.54

= $20.46

Increase in operating profit = ($25.00 - $20.46) * 6,000

= $27,240