CONTRIBUTION MARGIN, BREAK-EVEN UNITS, BREAK-EVEN SALES, MARGIN OF SAFETY, DEGREE OF OPERATING LEVERAGE
Sohrwide Company produces a variety of chemicals. One division makes reagents for laboratories. The division's projected income statement for the coming year is:
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Sales (128,000 units @ $50)
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$6,400,000
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Less: Variable expenses
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4,480,000
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Contribution margin
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$1,920,000
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Less: Fixed expenses
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1,000,000
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Operating income
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$ 920,000
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Required:
1. Compute the contribution margin per unit, and calculate the break-even point in units (round to the nearest unit). Calculate the contribution margin ratio and the break-even sales revenue.
2. The divisional manager has decided to increase the advertising budget by $100,000. This will increase sales revenues by $1 million. By how much will operating income increase or decrease as a result of this action?
3. Suppose sales revenues exceed the estimated amount on the income statement by $315,000. Without preparing a new income statement, by how much are profits underestimated?
4. Compute the margin of safety based on the original income statement.
5. Compute the degree of operating leverage based on the original income statement. If sales revenues are 20 percent greater than expected, what is the percentage increase in operating income? Round operating leverage to two decimal places.