Compute the degree of operating leverage

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Reference no: EM132034917

Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $32.

The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $22.40 per skateboard of which 70% is direct labor cost.

Over the past year the company sold 45,000 skateboards, with the following operating results:


Sales (45,000 skateboards)	$	1,440,000
Variable expenses		1,008,000

Contribution margin		432,000
Fixed expenses		288,000

Net operating income	$	144,000

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. Omit the "%" sign in your response.)

Contribution margin %
Unit sales to break even 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

2. Due to an increase in labor rates, the company estimates that variable costs will increase by $1.60 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $32.00, 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. Omit the "%" sign in your response.)

Contribution margin %

Unit sales to break even skateboards

3. Refer to the data in (2) above. If the expected change in variable costs takes place, 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

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. Omit the "tiny_mce_markerquot; sign in your response.)

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 20%, 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. Omit the "%" sign in your response.)

Contribution margin %
Unit sales to break even 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 45,000 skateboards (the same number as sold last year). Prepare a contribution format income statement. (Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "tiny_mce_markerquot; sign in your response.)

Contribution Income Statement.

b-2. Compute the degree of operating leverage. (Round your answer to 2 decimal places.)

Reference no: EM132034917

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