College Try Calendars imprints calendars with college names. The company has fixed expenses of $1,095,000 each month plus variable expenses of $4.00 per carton of calendars. Of the variable expense, 70% is cost of goods sold, while the remaining 30% relates to variable operating expenses. The company sells each carton of calendars for $12.00.
1. Compute the number of cartons of calendars that College Try Calendars must sell each month to breakeven. Begin by determining the basic income statement equation.
2. Compute the dollar amount of monthly sales that the company needs in order to earn $312,000 in operating income.
3. Prepare the company's contribution margin income statement for June for sales of 450,000 cartons of calendars.
4. What is June's margin of safety (in dollars)? What is the operating leverage factor at this level of sales?
5. By what percentage will operating income change if July's sales volume is 14% higher?
What Is The Contribution Margin:
A company's Contribution Margin is often used internally for the purpose of calculating the break-even point. The Contribution Margin represents the leftover money from sales after deducting only the variable costs of production and to sell the goods.
Answer and Explanation:
Income = Units sold * (Selling price - variable cost) - fixed costs
Break-even = fixed costs / (Selling price - variable cost)
=1,095,000 / (12-4)
Units required = fixed costs and income / (Selling price - variable cost)
=(1,095,000+312,000 ) / (12-4)
=175,875 units * 12 selling price
|Sales = 450,000 *12||5,400,000|
|Variable costs =450,000 *8||3,600,000|
|Contribution margin 5.4 - 3.5 =||1,800,000|
|Operating income = 1,800,000-1,095,000||705,000|
Margin of safety = Sales level - sales at break-even
= 450,000 -136,875
=313,125 units * 12
Degree of operating leverage: Income / Sales
Change in income = Sales in June*12 * 14% * (Selling price-Variable cost)/selling price
=$252,000 / current income of 705,000
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Learn more about this topic:
from Introduction to Business: Homework Help ResourceChapter 22 / Lesson 20