Chapter 2, Problem 2.23P

1.

To determine

Introduction:

Contribution margin ratio:

Contribution margin ratio is defined as the percentage earned from the sales revenue. Sales revenue is the income earned by the company from selling of its products or services and thus contribution margin ratio is a percentage fixed by the company to be calculated upon sales revenue.

To calculate the product’s CM ratio.

2

To determine

Introduction:

Break-even point:

Break-even point is the point at which there is no profit or no loss because at this point the total cost is equal to the total sales revenue generated by the company. The contribution earned by the company is sufficient to cover all its costs at the break-even point and if the contribution is lesser then it is loss and if it is higher, then it is profit.

To calculate the break-even point in dollar sales using CM ratio.

3.

To determine

Introduction:

Income Statement:

A company’s financial statements include income statement, balance sheet and cash flow statement. An income statement shows the revenues, expenses and profit / loss earned over a period of time.

To determine the increase in net operating income if the current year’s sales increase by $75000 and the fixed expenses remains constant.

4.

To determine

Introduction:

Degree of operating leverage:

The degree of operating leverage is the percentage of increase or decrease in net operating income in relation with the increase or decrease in sales.

1. To determine the degree of operating leverage based on last year’s sales.
2. To determine the percentage increase in degree of operating leverage if the president expects this year’s sales to increase by 20%.

5.

To determine

Introduction:

Income Statement: A company’s financial statements include income statement, balance sheet and cash flow statement. An income statement shows the revenues, expenses and profit / loss earned over a period of time.

To determine the current year’s net operating income if the sales manager has recommended to reduce 10% in selling price combined with $ 30000 increase in advertising and 25% increase in unit sales and to provide recommendation whether to implement the sales manger’s recommendations.

6.

To determine

Introduction:

Income Statement:

A company’s financial statements include income statement, balance sheet and cash flow statement. An income statement shows the revenues, expenses and profit / loss earned over a period of time.

To determine how much the president can increase the current year’s advertising expense to earn the same net operating income as last year.