Reference no: EM132776195

ASD Company revenues and cost data for 2020 are presented in the following gross margin format:

Revenues 800,000

Cost of goods sold (all variable costs). 320,000

Gross Margin 480,000

Operating costs:

Salaries fixed 120000

Sales commissions (20% of sales). 160000

Depreciation of equipment. 20000

Store rent ($5,000 per month). 60000

Other operating costs* 80000 440000

Operating income (loss) 40000

An analysis of other operating costs reveals that it includes $64,000 variable costs, which vary with sales volume, and $16,000 fixed costs.

Required (show your work)

Problem a) Compute (i) the (total) contribution margin and (ii) the contribution margin percentage.

Problem b) Compute the sales revenue required to achieve an operating profit of $60,000.

Problem c) Calculate operating leverage at the current ($800,000) level of sales revenue. Explain how you would use this measure of operating leverage.

Problem d) The manager of ASD estimates that units sold (and hence revenues) will increase by 20% if additional advertising costs of $15,000 are incurred. Calculate the impact on operating income of incurring the additional advertising costs.