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Compute the Degree of Operating Leverage for the company

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Reference no: EM132735631

Question - Pacific Electronics manufactures and sells two types of lamps: floor lamps and desk lamps.

Floor lamps sell for $30 and desk lamps sell for $20. The projected income statement for the coming year appears below:

Sales $600,000

Total variable costs (400,000)

Contribution Margin $200,000

Total Fixed cost (150,000)

Operating Income $50,000

The management of Pacific estimates that 60% of the company's sales revenue is generated by floor lamps and the remaining 40% by desk lamps. Floor lamps also accounts for 60% of the variable costs.

Required -

i. What is the Contribution Margin Ratio for Pacific Electronics? Explain the meaning of this ratio in words.

ii. How many units of floor lamps and how many units of desk lamps are currently sold? What is the sales mix ratio?

iii. How much total sales the company must produce to Break-even?

iv. What is the package Contribution Margin for the sale mix?

v. How many floor lamps and how many desk lamps Pacific must sell to break even?

vi. Compute the Degree of Operating Leverage for the company. Assume that actual revenue will be 40% higher than the current revenues. By what percentage will profits increase with this change in sales volume?

Reference no: EM132735631

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