Reference no: EM132784879

Question - 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) -

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

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

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

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.