Eddie Barzoon Inc. produces a variety of products. One division makes extremely realistic Halloween costumes. 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 a. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using the contribution margin ratio. b. Eddie Barzoon 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? Prepare a new income statement to support your answer. c. 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. d. Compute the margin of safety in dollars based on the given income statement. e. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?
Eddie Barzoon Inc. produces a variety of products. One division makes extremely realistic
Halloween costumes. The division’s
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
a. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using
the contribution margin ratio.
b. Eddie Barzoon 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? Prepare a new income statement to support your answer.
c. 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.
d. Compute the margin of safety in dollars based on the given income statement.
e. Compute the operating leverage based on the given income statement. (Round to three significant
digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in
profits?
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