Ch_4_Qs_CVP NE

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Sheridan College *

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Feb 20, 2024

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EXERCISE 4-8 Compute and Use the Degree of Operating Leverage [LOS (2] Engberg Compa installs lawn sod in home yards. The compay y's most recent monthly contribution format income statement appears below - = == Sales 100% Variable expenses 0% Contribution margin _60% Fixed expenses Operati income Required: 1. Compute the company’s degree of operating leverage. 2 Using the degree of operating leverage. estimate the impact on operating income of a 5% increase in sales. 3. Verify your estimate from (2) above by cos ucting a new contribution format income statement for the company. as ming a 5% increase in sales EXERCISE 4-14 Break-Even and Target Profit Anal s [LO3 (. LO4 LO5 @.L06 (3] Memtech Company is the exclusive distributor of a high-speed computer memory chip. The product sells for $50 per unit and has a CM ratio of 30%. The company’s fixed expenses are $240,000 per year Required: 1 What are the variable expenses per unit? 2 Determine the following @ What s the break-even point in units and in sales dollars? b. What sales level in units and in sales dollars is required to earn an operating income of $75,0007 ¢ Assume that through negotiation with the manufacturer, Memtech Company is able to reduce its variable expenses by S5 per unit. What is the company’s new break-even point in units and in sales dollars? d. Referring to the original data, what sales level in dollars is required to earn an annual profit of $75,000 after taxes if the company’s tax rate is 20%?
PROBLEM 4-21 Basic Cost-Volume-Prof - LO6(Z.LO8 )] Analysis; Break-Even Point; Cost Structure; Target Sales [LO1 (Z, LO2(@. LO4 @, LOS @) Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present., the ball is manufactured in a small plant that relies heavily on direct-labour workers. Thus, variable expenses are high, totalling $15 per ball, of which 60% is direct labour cost. Last year the company sold 30,000 of these balls, with the following results: Sales v iable expenses Contribution margin Fixed expenses Operating income Required: 1. Compute (a) the CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. 2. Due to an increase in labour rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25. what will be the new CM ratio and break-even point in balls? 3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next Page 127 year to earn the same operating income, $90,000, as last year? R 4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year, what selling price per ball must it charge nest year to cover the increased labour costs? 5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40%. but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls? 6. Refer to the data in (5) above. @ Tf the new plant is built, how many balls will have to be sold next year to earn the same net operating income. $90,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year) Prepare a contribution format income statement and compute the degree of operating leverage ¢ Tf you were a member of top management, would you have been in favour of constructing the new plant? Explain
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