Question

Listed here are the total costs associated with the production of 1,000 drum sets manufactured by TrueBeat. The drum sets sell for $553 each. Costs 1. Plastic for casing-$21,000 2. Wages of assembly workers-$82,000 3. Property taxes on factory-$7,000 4. Accounting staff salaries-$32,000 5. Drum stands (1,000 stands purchased) $40,000 6. Rent cost of equipment for sales staff-$36,000 7. Upper management salaries-$220,000 8. Annual flat fee for factory maintenance service-$14,000 9. Sales commissions $18 per unit 10. Machinery depreciation, straight-line-$47,000

Answer 1

All amounts are in $

1. Sales Revenue = 1,000 units x $553 = $553,000

2. Net operating income

Variable Costs = 21,000 + 82,000 + 40,000 + 18,000 = 161,000

Fixed Costs = 7,000 + 32,000 + 36,000 + 220,000 + 14,000 + 47,000 = 356,000

Net Operating Income = Sales Revenue - Variable Costs - Fixed Costs

= 553,000 - 161,000 - 356,000

= 36,000

3. Contribution margin

Contribution margin amount = Sales Revenue - Variable Cost

= 553,000 - 161,000

= 392,000

4. Contribution margin % = Contribution / Sales

= 392,000/553,000 = 70.886076%

5. Breakeven Units

Contribution per unit = Total Contribution / Units

= 392,000/1000

= 392

Breakeven units = Fixed Costs/Contribution per unit

= 356,000/392

= 908.16 or 908 units (rounded off)

6. Breakeven in dollars = Fixed Costs/Contribution margin

= 356,000/70.886076%

= 502,214

Any minor difference is due to rounding off of contribution margin ratio

7. Margin of safety in units

= Total units - Breakeven units

= 1,000 units - 908 units

= 92 units

8. Margin of safety %

= [(Current sales - Breakeven sales)/current sales] x 100

= [(553,000 - 502,214)/553,000] x 100

= 9.18367%

9. Margin of safety dollars = Current Sales - Breakeven Sales

= 553,000 - 502,214

= 50,786

Any minor difference is due to rounding off of contribution margin ratio

10. Degree of Operating leverage

= (Sales - Variable Costs)/(Sales - Variable Costs - Fixed costs)

= (553,000 - 161,000)/(553,000-161,000-356,000)

= 392,000/36,000

= 10.8889

The company has a high degree of Operating leverage

Note :

In the question it is mentioned as following scenarios but no scenarios are given in question.