Question

Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $37. The skateboards are manufactured in an antiquated plant that relies heavily on direct labour workers. Thus, variable costs are high, totalling $25.90 per skateboard, of which 70% is direct labour cost. Over the past year the company sold 43,000 skateboards, with the following operating results: Sales (43,000 skateboards) Variable expenses $1,591,000 1,113,700 Contribution margin Fixed expenses 477,300 277,500 Net operating income $ 199,800 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards. 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 Unit sales to break-even point 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

Answer 1

Solution 1:
a. Contribution margin ratio = Contribution margin / sales = $477,300 / $1591,000 = 30%
Contribution margin per unit = $37 - $25.90 = $11.10 per unit
Breakeven sales units = Fixed cost / contribution margin per unit = $277,500 / 11.10 = 25000 units
b. Degree of operating leverage = Contribution margin / Net operating income = $477,300 / $199,800 = 2.39

Solution 2:
New variable cost per unit =  $25.90 + $1.85 = $27.75 per ball
new contribution margin per unit = $37 - $27.75 = $9.25 per unit
New contribution margin ratio = $9.25 / $37 =25%
New breakeven point in balls = $277,500 / $9.25 = 30000 units

Solution 3:
Nos of balls to be sold to earn target income = (Fixed cost + Target profit) / contribution margin per unit
= ($277,500 + $199,800) / $9.25 = 51600 units

Solution 4:
Variable cost per unit = $27.75 per unit
Required contribution margin ratio = 30%
required variable cost ratio = 70%
New selling price per unit = $27.75 / 70% = $39.64 per unit

Solution 5:
New variable cost per unit = $25.90 * 80% = $20.72 per unit
New contribution margin per unit = 37- $20.72 = $16.28 per unit
New fixed costs = $277,500*192% = $532,800
New CM ratio = $16.28/$37 = 44%
New breakeven point = $532,800/ $16.28 = 32727 units

Solution 6a:
Nos of balls to be sold to earn target income = (Fixed cost + Target profit) / contribution margin per unit
= ($532,800 + $199,800) / $16.28 = 45000 units

Solution 6b:

Н 5 6 7 Tyrene Products 8 Degree of operating leverage Particulars Sales (43000 $37) Amount 9 1591000 10 Variable cost (43000*$20.72) Contribution margin 11 890960 12 700040 Fixed expenses 13 532800 Net Operating income Degree of operating leverage (Contribution / Net Operating income) 14 167240 15 4.19 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 et219 Sheet208 Sheet209 Sheet210 Sheet211