Question

Required: 1a. Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Contribution margin 401 % o break-even point46.000 Skateboards Unit sales to point 46,000 skateboards 1b. Compute the degree of operating leverage at last year's level of sales. (Round your answer to 2 decimal places.) Degree of operating leverage 5.60 2. Due to an increase in labor rates, the company estimates that variable costs will increase by $2.88 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $36.00, what will be the new CM ratio and the new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number.) Contribution margin Unit sales to break-even point 321 % 57,500 skateboards Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $36. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totaling $21.60 per skateboard, of which 60% is direct labour cost. Over the past year the company sold 56,000 skateboards, with the following operating results: Sales (56,000 skateboards) Variable expenses $2,016,000 1,209,600 Contribution margin Fixed expenses 806,400 662,400 Net operating income $144,000 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards 4. Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Selling price 5. Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 80%, if the new plant is built, what would be the company's new CM ratio and new break-even point in skateboards? (Round your intermediate calculations and the "Contribution margin" answer to 2 decimal places and other answer to the nearest whole number .) Contribution margin Unit sales to break-even point skateboards 6. Refer to the data in (5) above. a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $144,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Number of skateboards b-1.Assume that the new plant is constructed and that next year the company manufactures and sells 56,000 skateboards (the same number as sold last year). Prepare a contribution format income statement. (Inp amounts as positive values except losses which should be indicated by minus sign.) Contribution Income Statement 1,290,240 $ 1,290,240 b- 2. Compute the degree of operating leverage. (Round your answer to 2 decimal places.) Degree of operating leverage

Answer 1

Solution 4:

New variable cost per unit = ($1,209,600 / 56000) + $2.88 = $24.48 per unit

Variable cost ratio = 60%

Unit selling price to maintain contribution margin ratio for last year = $24.48 / 60% = $40.80 per unit

Solution 5:

New Variable cost per unit = $21.60 * 60% = $12.96 per unit

New fixed costs = $662,400*180% = $1,192,320

New contribution margin per unit = $36 - $12.96 = $23.04 per unit

New CM ratio = $23.04 / $36 = 64%

Units sales to breakeven point = Fixed costs / contribution margin per unit = $1,192,320 / $23.04 = 51750 units

Solution 6a:

Nos of stakeboards to be sold to earn target income = (Fixed costs + Target income) / CM per unit

= ($1,192,320 + $144,000) / $23.04 = 58000 units

Solution 6b:

Tyrene Products
Contribution margin income statement
Particulars	Amount
Sales (56000*$36)	$2,016,000.00
Variable cost (56000*$12.96)	$725,760.00
Contribution margin	$1,290,240.00
Fixed expenses	$1,192,320.00
Net Operating income	$97,920.00
Degree of operating leverage (Contribution / Net Operating income)	13.18