Calculate the degree of operating leverage

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Reference no: EM131807289

Exercise : Target Profit, Margin of Safety, Operating Leverage, Contribution Margin,and Gross Margin

The following budget data apply to Newberry's Nutrition:

Sales (100,000 units) $1,000,000

Costs

Direct materials $300,000

Direct labor $200,000

Fixed factory overhead $100,000

Variable factory overhead $150,000

Marketing and administration $160,000

Total costs $910,000

Budgeted pre-tax income $90,000

Direct labour workers are paid hourly wages and go home when there is no work.

The marketingand administration costs include $50,000 that varies proportionately with production volume.Assume that sales and production volumes are equal.

A. Compute the number of units that must be sold to achieve a target after-tax incomeof $120,000, assuming a tax rate of 40%.

B. Calculate the margin of safety in both revenues and units.

C. Calculate the degree of operating leverage.

D. Prepare Newberry's Nutrition income statements in contribution margin format and grossmargin format

Reference no: EM131807289

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