11/1/23, 8:50 PM
Chapter 4 Post-Class Homework
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EJE Sardines Processing manufactures and sells canned sardines to restaurants. Variable cost per can amounts to $8 and
the selling price of each can is $24. Total annual fixed costs amount to $9,355,294. Sales are estimated to amount to
1,420,000 cans of sardines.
Do not enter dollar signs or commas in the input boxes.
Round dollar answers to the nearest whole number and round BE units up to the nearest whole number, unless otherwise
indicated.
a) Calculate the following values.
Gross Sales: $
Total Variable Costs: $
Contribution Margin: $
Operating Profit: $
b) If the company sells according to their estimates, what is the degree of operating leverage? The break-even point (in
units)?
Round the degree of operating leverage to 2 decimal places.
Degree of operating leverage: Break-even Point (units): c) If the company increases the sales volume (cans) by 40%, by what percentage will operating profit increase? By what
dollar amount will operating income increase? Use the degree of operating leverage.
Round the percentage increase to 2 decimal places.
Percentage Increase: %
Dollar Increase: $
d) If the company spends $22,000 as additional advertising expense (fixed cost), sales volume will increase by 8%.
Determine the new operating leverage and the new break-even point in units.
Round the degree of operating leverage to 2 decimal places.
Degree of operating leverage: Break-even point (units): Explanation
a) Gross Sales = Selling Price x Sales Quantity
Total Variable Costs = Variable Cost x Sales Quantity
Contribution Margin = Gross Sales - Total Variable Costs
Operating Income = Contribution Margin - Fixed Costs
Gross Sales: $34,080,000
Total Variable Costs: $11,360,000
Contribution Margin: $22,720,000
Operating Profit: $13,364,706
b) Degree of Operating Leverage = Contribution Margin ÷ Operating Income
Break-Even Point = Fixed Costs ÷ (Sales Price per unit - Variable Cost per unit)
Degree of operating leverage: 1.70
Break-even Point (units): 584,706
c) Percentage Increase = Degree of Operating Leverage x Percentage Increase in Sales
Dollar Increase = Operating Income x Percentage Increase
Percentage Increase: 68.00%
Dollar Increase: $9,088,000
d) Recalculate Contribution Margin with the sales increase and recalculate Operating Income with the additional fixed
