chapter 5 solutions

Chapter 05 - Cost-Volume-Profit Relationships

Essay Questions

201. Candice Corporation has decided to introduce a new product. The product can be manufactured using either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows:

The company's market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative expenses of the new product are $500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured.Required:a. Calculate the break-even point in units if Candice Corporation uses the:1. capital-intensive manufacturing method.2. labor-intensive manufacturing method.b. Determine the unit sales volume at which the net operating income is the same for the two manufacturing methods.c. Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the:1. capital-intensive manufacturing method.2. labor-intensive manufacturing method.d. What is your recommendation to management concerning which manufacturing method should be used?

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a. 1. Capital-intensive:Unit sales to break even = Fixed expenses Unit CM= ($2,440,000 + $500,000) ($30 per unit - $14 per unit - $2 per unit)= $2,940,000 $14 per unit= 210,000 units2. Labor-intensive:Unit sales to break even = Fixed expenses Unit CM= ($1,320,000 + $500,000) ($30 per unit - $17.60 per unit - $2 per unit)= $1,820,000 $10.40 per unit= 175,000 unitsb. Profit = Sales - Variable expenses - Fixed expensesCapital-intensive:Profit = $30Q - $16Q - $2,940,000 = $14Q - $2,940,000Labor-intensive:Profit = $30Q - $19.60Q - $1,820,000 = $10.40Q - $1,820,000The profits are equal when:$14Q - $2,940,000 = $10.40Q - $1,820,000$3.60Q = $1,120,000Q = $1,120,000 $3.60Q = 311,111c. 1. Capital-intensive:

Degree of operating leverage = Contribution margin Net operating income= $3,500,000 $560,000 = 6.252. Labor-intensive:

Degree of operating leverage = Contribution margin Net operating income= $2,600,000 $780,000 = 3.33d. The decision hinges upon the expected sales of the new product. If management is confident that sales will be in excess of 311,111 units, then the capital-intensive method should be used. If sales are likely to fall below this number, then the labor-intensive method should be used. Management should also be aware that net operating income will be more volatile with the capital-intensive method since it has higher operating leverage.

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AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-06 Determine the break-even pointLearning Objective: 05-08 Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeLevel: Hard

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202. The following monthly data in contribution format are available for the MN Company and its only product, Product SD:

The company produced and sold 300 units during the month and had no beginning or ending inventories.Required:a. Without resorting to calculations, what is the total contribution margin at the break-even point?b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SD. This change would reduce variable expenses by $18 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made?c. Assume that MN Company is currently selling 300 units of Product SD per month. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made?d. Assume that MN Company is currently selling 300 units of Product SD. Management wants to automate a portion of the production process for Product SD. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should these changes be made?

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a. The total contribution margin would be $40,000 since it is equal to the fixed expenses at the break-even point.b. The $18 decrease in variable costs will cause the contribution margin per unit to increase from $170 to $188.

The less costly components should not be used in the manufacture of Product SD. Net operating income will decrease by $4,000.c. The decrease in selling price per unit will cause the unit contribution margin to decrease from $170 to $148.

The changes should not be made.d. The use of the automated process would affect both fixed and variable costs. Fixed expenses will increase by $10,000 from $40,000 to $50,000. Variable costs will decrease by $20 from $109 to $89, and the unit contribution margin will increase from $170 to $190.

The changes should be made.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-06 Determine the break-even pointLevel: Hard

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203. Guitian Corporation produces and sells a single product. The company's contribution format income statement for June appears below:

Required:Redo the company's contribution format income statement assuming that the company sells 5,700 units.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-01 Explain how changes in activity affect contribution margin and net operating incomeLevel: Easy

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204. Jalonen Inc., which produces and sells a single product, has provided the following contribution format income statement for October:

Required:Redo the company's contribution format income statement assuming that the company sells 4,500 units.


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205. Colen Corporation produces and sells a single product. In January, the company sold 1,700 units. Its total sales were $153,000, its total variable expenses were $79,900, and its total fixed expenses were $56,800.Required:a. Construct the company's contribution format income statement for January in good form.b. Redo the company's contribution format income statement assuming that the company sells 1,600 units.


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206. In September, Pino Corporation sold 2,100 units of its only product. Its total sales were $195,300, its total variable expenses were $84,000, and its total fixed expenses were $98,700.Required:a. Construct the company's contribution format income statement for September in good form.b. Redo the company's contribution format income statement assuming that the company sells 2,300 units.


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207. Iron Decor manufactures decorative iron railings. In preparing for next year's operations, management has developed the following estimates:

Required:Compute the following items:a. Unit contribution margin.b. Contribution margin ratio.c. Break-even in dollar sales.d. Margin of safety percentage.e. If the sales volume increases by 20% with no change in total fixed expenses, what will be the change in net operating income?f. If the per unit variable production costs increase by 15%, and if fixed selling and administrative expenses increase by 12%, what will be the new break-even point in dollar sales?

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b. CM ratio = Unit CM Selling price = $29.00 per unit $50.00 per unit = 58%

Dollar sales to break even = Fixed expenses CM ratio = $110,000 0.58 = $189,655 (rounded)

Margin of safety percentage = Margin of safety in dollars Current sales= $810,345 $1,000,000 = 81.03%

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CM ratio = $26.60 $50.00 = 53.2%

New break-even in dollars = $113,600 0.532 = $213,534 (rounded)

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-06 Determine the break-even pointLearning Objective: 05-07 Compute the margin of safety and explain its significanceLevel: Medium

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208. Bumpass Corporation's contribution margin ratio is 74% and its fixed monthly expenses are $43,000. Assume that the company's sales for July are expected to be $102,000.Required:Estimate the company's net operating income for July, assuming that the fixed monthly expenses do not change. Show your work!

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-03 Use the contribution margin ratio (cm ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeLevel: Easy

209. The management of Paye Corporation expects sales in April to be $130,000. The company's contribution margin ratio is 65% and its fixed monthly expenses are $54,000.Required:Estimate the company's net operating income for April, assuming that the fixed monthly expenses do not change. Show your work!


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210. Schlag Inc. expects its sales in January to be $111,000. The company's contribution margin ratio is 65% and its fixed monthly expenses are $64,000.Required:Estimate the company's net operating income for January, assuming that the fixed monthly expenses do not change. Show your work!


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211. Parkins Company produces and sells a single product. The company's income statement for the most recent month is given below:

There are no beginning or ending inventories.Required:a. Compute the company's monthly break-even point in units of product.b. What would the company's monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses?c. What dollar sales must the company achieve in order to earn a net operating income of $50,000 per month?d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in units.

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a. The company's income statement in contribution format would be:

The break-even point in units would be: $72,000 $16 per unit = 4,500 unitsb. 6,000 units 125% = 7,500 units

c. ($72,000 + $50,000) 0.40 = $305,000d. Direct labor costs are presently $10 per unit ($60,000 6,000 units) and will decrease by $4 per unit ($10 40%). Therefore, the company's new cost structure will be:

((2 $30,000) + $42,000) $20 per unit = 5,100 units

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-05 Determine the level of sales needed to achieve a desired target profitLearning Objective: 05-06 Determine the break-even pointLevel: Medium

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212. Almo company manufactures and sells adjustable canopies that attach to motor homes and trailers. Almo developed its budget for the current year assuming that the canopies would sell at a price of $400 each. The variable expenses for each canopy were forecasted to be $200 and the annual fixed expenses were forecasted to be $100,000. Almo had targeted a profit of $400,000. While Almo's sales usually rise during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of the year, only 350 units had been sold at the established price, with variable expense as planned, and it was clear that the target profit for the year would not be reached unless some actions were taken. Almo's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following three alternatives were presented to the president, only one of which can be selected.1. Reduce the selling price by $40. The marketing department forecasts that with the lower price, 2,700 units could be sold during the remainder of the year.2. Lower variable expenses per unit by $25 through the use of less expensive materials. Because of the difference in materials, the selling price would have to be lowered by $30 and sales of 2,200 units for the remainder of the year are forecast.3. Cut fixed expenses by $10,000 and lower the selling price by 5 percent. Sales of 2,000 units would be expected for the remainder of the year.Required:a. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to break even.b. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to attain the target profit of $400,000.c. Determine which of the alternatives Almo's president should select to maximize profit.

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a. Unit sales to break even = Fixed expenses Unit CM= $100,000 ($400 per unit - $200 per unit) = $100,000 $200 per unit = 500 unitsb. Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($400,000 + $100,000) $200 per unit = 2,500 unitsc. Which alternative should be selected?Profit = Sales - Variable expenses - Fixed expensesAlternative 1:Sales = ($400 per unit 350 units) + ($360 per unit 2,700 units) = $1,112,000Variable expenses = ($200 per unit 350 units) + ($200 per unit 2,700 units) = $610,000Fixed expenses = $100,000Profit = Sales - Variable expenses - Fixed expenses = $1,112,000 - $610,000 - $100,000= $402,000Alternative 2:Sales = ($400 per unit 350 units) + ($370 per unit 2,200 units) = $954,000Variable expenses = ($200 per unit 350 units) + ($175 per unit 2,200 units) = $455,000Fixed expenses = $100,000Profit = Sales - Variable expenses - Fixed expenses = $954,000 - $455,000 - $100,000= $399,000Alternative 3:Sales = ($400 per unit 350 units) + ($380 per unit 2,000 units) = $900,000Variable expenses = ($200 per unit 350 units) + ($200 per unit 2,200 units) = $510,000Fixed expenses = $90,000Profit = Sales - Variable expenses - Fixed expenses = $900,000 - $510,000 - $90,000= $300,000

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLearning Objective: 05-05 Determine the level of sales needed to achieve a desired target profitLearning Objective: 05-06 Determine the break-even pointLevel: Hard

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213. Zeeb Corporation produces and sells a single product. Data concerning that product appear below:

Fixed expenses are $355,000 per month. The company is currently selling 5,000 units per month.Required:The marketing manager believes that a $12,000 increase in the monthly advertising budget would result in a 160 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs; fixed costs; selling price; and volumeLevel: Easy

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214. Data concerning Lantieri Corporation's single product appear below:

Fixed expenses are $162,000 per month. The company is currently selling 3,000 units per month.Required:The marketing manager believes that a $10,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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215. Calderon Corporation produces and sells a single product. Data concerning that product appear below:

Fixed expenses are $110,000 per month. The company is currently selling 1,000 units per month.Required:Management is considering using a new component that would increase the unit variable cost by $56. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work!

Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.


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216. Data concerning Goulbourne Corporation's single product appear below:

Fixed expenses are $444,000 per month. The company is currently selling 7,000 units per month.Required:Management is considering using a new component that would increase the unit variable cost by $2. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work!

Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.


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217. Tapp Corporation produces and sells a single product. Data concerning that product appear below:

Fixed expenses are $226,000 per month. The company is currently selling 2,000 units per month.Required:The marketing manager would like to cut the selling price by $12 and increase the advertising budget by $13,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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218. Data concerning Maline Corporation's single product appear below:

Fixed expenses are $55,000 per month. The company is currently selling 1,000 units per month.Required:The marketing manager would like to cut the selling price by $6 and increase the advertising budget by $2,700 per month. The marketing manager predicts that these two changes would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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219. Dubitsky Corporation produces and sells a single product. Data concerning that product appear below:

Fixed expenses are $516,000 per month. The company is currently selling 7,000 units per month.Required:The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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220. Data concerning Tietz Corporation's single product appear below:

Fixed expenses are $1,044,000 per month. The company is currently selling 9,000 units per month.Required:The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $14 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $110,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 400 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!


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221. Churchwell Corporation produces and sells a single product. Data concerning that product appear below:

Required:a. Assume the company's monthly target profit is $69,000. Determine the unit sales to attain that target profit. Show your work!b. Assume the company's monthly target profit is $41,400. Determine the dollar sales to attain that target profit. Show your work!

a. Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($621,000 + $69,000) $138.00 per unit = 5,000 unitsb. Dollar sales to attain target profit = (Target profit + Fixed expenses) CM ratio= ($621,000 + $41,400) 0.60 = $1,104,000

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-05 Determine the level of sales needed to achieve a desired target profitLevel: Easy

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222. Guagliano Corporation produces and sells a single product whose selling price is $110.00 per unit and whose variable expense is $29.70 per unit. The company's monthly fixed expense is $345,290.Required:a. Assume the company's monthly target profit is $16,060. Determine the unit sales to attain that target profit. Show your work!b. Assume the company's monthly target profit is $40,150. Determine the dollar sales to attain that target profit. Show your work!

a. Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($345,290 + $16,060) $80.30 per unit = 4,500 unitsb. Dollar sales to attain target profit = (Target profit + Fixed expenses) CM ratio= ($345,290 + $40,150) 0.73 = $528,000


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223. Arzola Corporation produces and sells a single product. Data concerning that product appear below:

Required:Assume the company's monthly target profit is $17,080. Determine the unit sales to attain that target profit. Show your work!

Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($461,160 + $17,080) $85.40 = 5,600


224. The selling price of Bayard Corporation's only product is $230.00 per unit and its variable expense is $80.50 per unit. The company's monthly fixed expense is $792,350.Required:Assume the company's monthly target profit is $29,900. Determine the unit sales to attain that target profit. Show your work!

Unit sales to attain target profit = (Target profit + Fixed expenses) Unit CM= ($792,350 + $29,900) $149.50 per unit = 5,500 units


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225. Dagnan Corporation produces and sells a single product whose contribution margin ratio is 66%. The company's monthly fixed expense is $667,920 and the company's monthly target profit is $72,600.Required:Determine the dollar sales to attain the company's target profit. Show your work!

Dollar sales to attain target profit = (Target profit + Fixed expenses) CM ratio= ($667,920 + $72,600) 0.66 = $1,122,000


226. The contribution margin ratio of Thronson Corporation's only product is 69%. The company's monthly fixed expense is $455,400 and the company's monthly target profit is $41,400.Required:Determine the dollar sales to attain the company's target profit. Show your work!

Dollar sales to attain target profit = (Target profit + Fixed expenses) CM ratio= ($455,400 + $41,400) 0.69 = $720,000


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227. Penury Company offers two products. At present, the following represents the usual results of a month's operations:

Required:a. Find the break-even point in dollars.b. Find the margin of safety in dollars.c. The company is considering decreasing product K's unit sales to 80,000 and increasing product L's unit sales to 180,000, leaving unchanged the selling price per unit, variable expense per unit, and total fixed expenses. Would you advise adopting this plan?d. Refer to (c) above. Under the new plan, find the break-even point in dollars.e. Under the new plan in (c) above, find the margin of safety in dollars.

a. CM ratio = Contribution margin Sales revenue = $80,000 $200,000 = 40%Dollar sales to break even = Fixed expenses CM ratio = $50,000 0.40 = $125,000b. Margin of safety = Sales revenue - Sales at break-even = $200,000 - $125,000 = $75,000

Yes, the new arrangement is more profitable.d. CM ratio = Contribution margin Sales revenue = $84,000 $240,000 = 35%Dollar sales to break even = Fixed expense CM ratio = $50,000 0.35 = $142,857e. Margin of safety = Sales revenue - Sales at break-even = $240,000 - $142,857 = $97,143

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AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-06 Determine the break-even pointLearning Objective: 05-07 Compute the margin of safety and explain its significanceLearning Objective: 05-09 Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even pointLevel: Medium

228. Aziz Corporation produces and sells a single product. Data concerning that product appear below:

Required:Determine the monthly break-even in either unit or total dollar sales. Show your work!

Unit sales to break even = Fixed expenses Unit CM = $165,347 $102.70 per unit = 1,610 unitsDollar sales to break even = Fixed expenses CM ratio = $165,347 0.79 = $209,300

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-06 Determine the break-even pointLevel: Easy

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229. Madlem, Inc., produces and sells a single product whose selling price is $240.00 per unit and whose variable expense is $86.40 per unit. The company's fixed expense is $720,384 per month.Required:Determine the monthly break-even in either unit or total dollar sales. Show your work!

Unit sales to break even = Fixed expenses Unit CM = $720,384 $153.60 per unit = 4,690 unitsDollar sales to break even = Fixed expenses CM ratio = $720,384 0.64 = $1,125,600


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230. Heckaman Corporation produces and sells a single product. Data concerning that product appear below:

Required:Determine the monthly break-even in unit sales. Show your work!

Unit sales to break even = Fixed expenses Unit CM = $239,292 $117.30 per unit = 2,040


231. Titlow, Inc., produces and sells a single product. The product sells for $220.00 per unit and its variable expense is $57.20 per unit. The company's monthly fixed expense is $713,064.Required:Determine the monthly break-even in unit sales. Show your work!

Unit sales to break even = Fixed expenses Unit CM = $713,064 $162.80 per unit = 4,380 units


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232. Longiotti Corporation produces and sells a single product. Data concerning that product appear below:

Required:Determine the monthly break-even in total dollar sales. Show your work!

Dollar sales to break even = Fixed expenses CM ratio = $159,600 0.76 = $210,000


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233. Sperazza International, Inc., produces and sells a single product. The product sells for $240.00 per unit and its variable expense is $96.00 per unit. The company's monthly fixed expense is $699,840.Required:Determine the monthly break-even in total dollar sales. Show your work!

Dollar sales to break even = Fixed expenses CM ratio = $699,840 0.60 = $1,166,400


234. Swem Corporation makes a product that sells for $110 per unit. The product's current sales are 17,700 units and its break-even sales are 14,337 units.Required:Compute the margin of safety in both dollars and as a percentage of sales.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-07 Compute the margin of safety and explain its significanceLevel: Easy

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235. Suermann Corporation's only product sells for $140 per unit. Its current sales are 17,500 units and its break-even sales are 14,350 units.Required:Compute the margin of safety in both dollars and as a percentage of sales.


236. Dampf Inc. has provided the following data concerning its only product:

Required:Compute the margin of safety in both dollars and as a percentage of sales.


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237. Mitzel Corporation has provided its contribution format income statement for May.

Required:a. Compute the degree of operating leverage to two decimal places.b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from an 18% increase in sales.

a. Degree of operating leverage = Contribution margin Net operating income= $34,800 $8,300 = 4.19b. Percent increase in net operating income = Percent increase in sales Degree of operating leverage= 18% 4.19 = 75.42%

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-08 Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeLevel: Easy

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238. Butremovic Corporation's contribution format income statement for the most recent month follows:

Required:a. Compute the degree of operating leverage to two decimal places.b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from an 8% increase in sales.



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239. In the most recent month, Eckstrom Corporation's total contribution margin was $208,000 and its net operating income $39,400.Required:a. Compute the degree of operating leverage to two decimal places.b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 1% increase in sales.



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240. Stanger Inc. produces and sells two products. Data concerning those products for the most recent month appear below:

Fixed expenses for the entire company were $17,570.Required:a. Determine the overall break-even point for the company. Show your work!b. If the sales mix shifts toward Product N16S with no change in total sales, what will happen to the break-even point for the company? Explain.

Overall CM ratio = Total contribution margin Total sales = $21,730 $41,000 = 0.53Break-even point in total sales dollars = Fixed expenses Overall CM ratio= $17,570 0.53 = $33,151

Since Product N16S's CM ratio is less than Product X07D's, a shift in the sales mix toward Product N16S will result in an increase in the company's overall break-even point.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-09 Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even pointLevel: Easy

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241. Torri Inc. produces and sells two products. During the most recent month, Product C34M's sales were $25,000 and its variable expenses were $5,750. Product Y03Z's sales were $40,000 and its variable expenses were $9,850. The company's fixed expenses were $48,310.Required:a. Determine the overall break-even point for the company. Show your work!b. If the sales mix shifts toward Product C34M with no change in total sales, what will happen to the break-even point for the company? Explain.

Overall CM ratio = Total contribution margin Total sales = $49,400 $65,000 = 0.76Break-even point in total sales dollars = Fixed expenses Overall CM ratio= $48,310 0.76 = $63,566

Since Product C34M's CM ratio is greater than Product Y03Z's, a shift in the sales mix toward Product C34M will result in a decrease in the company's overall break-even point.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 05-09 Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even pointLevel: Easy

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