Reference no: EM13509302

Stratford Company distributes a lightweight lawn chair that sells for $120 per unit. Variable expenses are $60.00 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 "tiny_mce_markerquot; sign in your response.)

Break-even point in sales dollars $

3. The company estimates that sales will increase by $50,000 during the coming year due to increased demand. By how much should net operating income increase? (Omit the "tiny_mce_markerquot; sign in your response.)

Net operating income increases by $

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

Sales	$	3,000,000
Variable expenses		1,500,000
Contribution margin		1,500,000
Fixed expenses		180,000
Net operating income	$	1,320,000

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 11% 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 "tiny_mce_markerquot; sign in your response.)

Net operating income increases by $

5. Refer to the original data. Assume that the company sold 45,000 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $68,000 increase in advertising expenditures, would increase annual unit sales by 50%.

a. Prepare two contribution format income statements, one showing the results of last year%u2019s 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 "tiny_mce_markerquot; sign in your response.)

Last Year 45,000 units

Proposed units

	Total	Per Unit	Total	Per Unit
(Click to select) Fixed expenses Net operating income (loss) Variable expenses Contribution margin Sales	$	$	$	$
(Click to select) Sales Variable expenses Net operating income (loss) Fixed expenses Contribution margin
(Click to select) Contribution margin Fixed expenses Variable expenses Sales Net operating income (loss)		$		$
(Click to select) Contribution margin Fixed expenses Sales Net operating income (loss) Variable expenses
(Click to select) Sales Net operating income (loss) Variable expenses Contribution margin Fixed expenses	$		$

b. Would you recommend that the company do as the sales manager suggests?
Yes
No

6.  Refer to the original data. Assume again that the company sold 45,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $2.50 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. (Omit the "tiny_mce_markerquot; sign in your response.)

The amount by which advertising can be increased is $