Sattler Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range.?Sales (8,000 units)$480,000?Variable expenses336,000?Contribution margin144,000?Fixed expenses142,200?Net operating income$1,800Required:a. What is the contribution margin per unit?b. What is the variable expense ratio?c. If sales decline to 7,900 units, what would be the estimated net operating income?d. If the variable cost per unit increases by $5, spending on advertising increases by $2,000, and unit sales increase by 3,400 units, what would be the estimated net operating income?e. What is the break-even point in dollar sales?f. Estimate how many units must be sold to achieve a target profit of $50,400.g. What is the margin
of safety percentage?h. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 15% increase in sales?
What will be an ideal response?
a.
| ? | Total contribution margin (a) | $144,000 | ? |
| ? | Total unit sales (b) | 8,000 | units |
| ? | Unit contribution margin (a) ÷ (b) | $18 | per unit |
Alternatively,
| ? | Selling price per unit ($480,000 ÷ 8,000 units) | $60 |
| ? | Variable cost per unit ($336,000 ÷ 8,000 units) | 42 |
| ? | Unit contribution margin | $18 |
b. Variable expense ratio = Variable expenses ÷ Sales = $336,000 ÷ $480,000 = 70%
c.
| ? | Unit contribution margin (a) | $18 | per unit |
| ? | Unit sales (b) | 7,900 | units |
| ? | Contribution margin (a) × (b) | $142,200 | ? |
| ? | Fixed expenses | 142,200 | ? |
| ? | Net operating income | $0 | ? |
d.
| ? | Selling price | $60 | per unit |
| ? | Variable cost per price ($42 per unit + $5 per unit) | 47 | per unit |
| ? | Unit contribution margin (a) | $13 | per unit |
| ? | Unit sales (8,000 units + 3,400 units) (b) | 11,400 | units |
| ? | Contribution margin (a) × (b) | $148,200 | ? |
| ? | Fixed expenses ($142,200 + $2,000) | 144,200 | ? |
| ? | Net operating income | $4,000 | ? |
e. Dollar sales to break even = Fixed expenses ÷ CM ratio = $142,200 ÷ 30% = $474,000
f. Unit sales to attain a target profit = (Target profit + Fixed expenses) ÷ Unit CM
= ($50,400 + $142,200) ÷ $18 per unit = $192,600 ÷ $18 per unit = 10,700 units
g. Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales
= $6,000 ÷ $480,000 = 1%
h. Percentage change in net operating income = Degree of operating leverage × Percentage change in sales
= 80.0 × 15% = 1200%
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