Use the cm ratio to determine the break-even point in sales

Assignment Help Accounting Basics

Reference no: EM13574326

Stratford Company distributes a lightweight lawn chair that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $180,000 annually.

Required:
1.	What is the product's CM ratio? (Do not round intermediate calculations. Omit the "%" sign in your response.)

CM ratio

2.	Use the CM ratio to determine the break-even point in sales dollars. (Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Break-even point in sales dollars

3.	The company estimates that sales will increase by $47,000 during the coming year due to increased demand. By how much should net operating income increase? (Omit the "$" sign in your response.)

Net operating income increases by

4.	Assume that the operating results for last year were as follows:


Sales	$	1,000,000
Variable expenses		500,000

Contribution margin		500,000
Fixed expenses		180,000

Net operating income	$	320,000

a.	Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

Degree of operating leverage

b.	The president expects sales to increase by 16% next year. By how much should net operating income increase? (Round your intermediate calculations to 2 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Net operating income increases by

5.	Refer to the original data. Assume that the company sold 43,500 units last year. The sales manager is convinced that a 13% reduction in the selling price, combined with a $78,000 increase in advertising expenditures, would increase annual unit sales by 50%.

Prepare two contribution format income statements, one showing the results of last year's operations and one showing what the results of operations would be if these changes were made.(Input all amounts as positive values except losses which should be indicated by minus sign. Do not round intermediate calculations. Round proposed units to the nearest whole number. Round your "Per unit" answers to 2 decimal places.Omit the "$" sign in your response.)

Last Year
43,500 units

Proposed
units

	Total	Per Unit	Total	Per Unit
(Click to select)Contribution marginSalesNet operating income (loss)Fixed expensesVariable expenses	$	$	$	$
(Click to select)SalesVariable expensesFixed expensesNet operating income (loss)Contribution margin

(Click to select)Fixed expensesVariable expensesNet operating income (loss)Contribution marginSales		$		$
(Click to select)SalesFixed expensesContribution marginNet operating income (loss)Variable expenses

(Click to select)Fixed expensesContribution marginVariable expensesSalesNet operating income (loss)	$		$

Would you recommend that the company do as the sales manager suggests?

	Yes
	No

Reference no: EM13574326

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