Katayama Company produces a variety of products. One division makes neoprene wetsuits. Thedivision’s projected income statement for the coming year is as follows:Sales (65,000 units) $15,600,000Less: Variable expenses 8,736,000Contribution margin $ 6,864,000Less: Fixed expenses 4,012,000Operating income $ 2,852,000 Required:1. Compute the contribution margin per unit, and calculate the break-even point in units.Repeat, using the contribution margin ratio.2. The divisional manager has decided to increase the advertising budget by $140,000 and cutthe 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 sup-port your answer. 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 areunderestimated.4. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a taxrate of 34 percent. (Round your answer up to the next whole unit.)5. Compute the margin of safety in dollars based on the given income statement. 6. Compute the operating leverage based on the given income statement. (Round to three sig-nificant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?
Katayama Company produces a variety of products. One division makes neoprene wetsuits. 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
Required:
1. Compute the contribution margin per unit, and calculate the break-even point in units.
Repeat, using the contribution margin ratio.
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? Prepare a new income statement to sup-
port your answer.
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 up to the next whole unit.)
5. Compute the margin of safety in dollars based on the given income statement.
6. Compute the operating leverage based on the given income statement. (Round to three sig-
nificant digits.) If sales revenues are 20 percent greater than expected, what is the percentage
increase in profits?
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