Basic CVP Concepts Katayama Company produces a variety of products. One division makes neoprene wetsuits. The division’s projected income statement for the coming year is as follows: Sales (65,000 units) $15,600,000 Less: Variable expenses 8,736,000    Contribution margin $6,864,000 Less: Fixed expenses 4,012,000    Operating income $2,852,000 2. The divisional manager has decided to increase the advertising budget by $140,000 and cut the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the division's financial situation? 3. Suppose sales revenues exceed the estimated amount on the income statement by $612,000. Without preparing a new income statement, determine by how much profits are underestimated. $ 4. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. Round your answer to the nearest whole unit.  units 5. Compute the margin of safety in dollars based on the given income statement. Round your answer to the nearest dollar. $ 6. Compute the operating leverage based on the given income statement. Round your answer to three decimal places. Use the rounded answer in the subsequent computation. 7. If sales revenues are 20 percent greater than expected, what is the percentage increase in profits? Round the percentage to two decimal places.  %

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Basic CVP Concepts

Katayama Company produces a variety of products. One division makes neoprene wetsuits. The division’s projected income statement for the coming year is as follows:

Sales (65,000 units) $15,600,000
Less: Variable expenses 8,736,000
   Contribution margin $6,864,000
Less: Fixed expenses 4,012,000
   Operating income $2,852,000

2. The divisional manager has decided to increase the advertising budget by $140,000 and cut the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the division's financial situation?

3. Suppose sales revenues exceed the estimated amount on the income statement by $612,000. Without preparing a new income statement, determine by how much profits are underestimated.
$

4. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. Round your answer to the nearest whole unit.
 units

5. Compute the margin of safety in dollars based on the given income statement. Round your answer to the nearest dollar.
$

6. Compute the operating leverage based on the given income statement. Round your answer to three decimal places. Use the rounded answer in the subsequent computation.

7. If sales revenues are 20 percent greater than expected, what is the percentage increase in profits? Round the percentage to two decimal places.
 %

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