# The section of Waterways that produces controllers for the company provided the following...

## Question:

The section of Waterways that produces controllers for the company provided the following information.

Sales for month of February 4,000

Variable manufacturing cost per unit $9.75 Sales price per unit$42.50

Fixed manufacturing overhead cost (per month for controllers) $81,000 Variable selling and administrative expenses per unit$3.00

Fixed selling and administrative expenses (per month for controllers) $13,122 Using this information for the controllers, determine the contribution margin ratio, the degree of operating leverage, the break-even point in dollars, and the margin of safety ratio for Waterways Corporation on this product. ## Variable costing: Variable costing income statement is a type of income statement mainly used by management for internal reporting purposes only. Using variable costing, the management can derive contribution margin , contribution margin ratio, degree of operating leverage, break-even point, and margin of safety ratio. All of these are helpful for decision making purposes. ## Answer and Explanation: The questions asked are quite straightforward since we can solve all of these using their corresponding formula. See detailed computation below: Contribution margin ratio • Contribution margin ratio = (Sales price per unit - Variable cost per unit) / Sales price per unit • Contribution margin ratio = ($42.50 - $9.75 -$3) / $42.50 • Contribution margin ratio =$29,75 / $42.50 • Contribution margin ratio = 0.7 or 70% Degree of operating leverage • Degree of operating leverage = Contribution margin / Operating income • Degree of operating leverage = (4,000 units x$42. 5 per unit x 70%) / (Contribution margin - Fixed manufacturing overhead cost - Fixed selling and administrative expenses)
• Degree of operating leverage = (4,000 units x $42. 5 per unit x 70%) / ((4,000 units x$42. 5 per unit x 70%) - Fixed manufacturing overhead cost - Fixed selling and administrative expenses))
• Degree of operating leverage = $119,000 / ($119,000 - $81,000 -$13,122)
• Degree of operating leverage = $119,000 /$24,878
• Degree of operating leverage = 4.78

Break-even point in dollars

• Break-even point (dollars) = Total fixed cost / Contribution margin ratio
• Break-even point (dollars) = ($81,000 +$13,122) / 70%
• Break-even point (dollars) = $94,122 / 70% • Break-even point (dollars) =$134,460

Margin of safety ratio

• Margin of safety ratio = (Current sales level - Break-even point) / Current sales level
• Margin of safety ratio = ((4,000 units x $42.5) -$134,460) / (4,000 units x $42.5) • Margin of safety ratio = ($170,000 -$134,460) /$170,000
• Margin of safety ratio = 0.209 or 21% 