Reference no: EM13569125

Tyrene Products manufactures recreational equipment. One of the company's products, a skateboard, sells for $35. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $21.00 per skateboard of which 60% is direct labor cost.

Over the past year the company sold 41,000 skateboards, with the following operating results.

Sales (41,000 skateboards)     $1,435,000

Variable Exp.                             861,000

Contribution Margin                   574,000

Fixed Expenses                           420,000

Net Operating Income                $154,000

1.)Refer to the original data: The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 30%, but it would cause fixed costs to increase by 76%. If the new plant is built, what would be the company's new CM ratio and new break-even point in skateboards?

Contribution Margin                                    %?

Unit Sales to Break Even                  Skateboards?

A.) Refer to data in (1.): If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $154,000, as last year?

Number of skateboards                    ????

B.) Assume that the new plant is constructed and that next year the company manufactures and sells 41,000 skateboards (the same number as sold last year). Prepare a contribution format income statement.

Sales

Variable Expenses

Contribution Margin

Fixed Expenses

Net Operating Income (loss)

C.) Compute the degree of operating leverage.

Leverage