PROBLEM: Marjolein & Co. makes a designer alarm clock that sells for $20 per unit. Variable costs are $6 per unit, and fixed costs total $210,000 per year.
Answer the following independent questions:
1. What is the product's CM ratio??
2. Use the CM ratio to determine the break-even point in sales dollars.
3. Due to an increase in demand, the company estimates that sales will increase by $200,000 during the next year. By how much should net operating income (or net operating loss) change, assuming that fixed costs do not change?
4. Assume that the operating results for last year were:
Less variable expenses 96,000
Contribution margin 224,000
less fixed expenses 210,000
Net operating income $14,000
4a. Compute the degree of operating leverage at the current level of sales. (I got 1.0 for an answer)
4b. The president expects sales to increase by 5% next year. By what percentage should net operating income increase? ( I got 5% for my answer)
5. This question and 6. are where I got confused
5. Refer to the original data. Assume that the company sold 20,000 units last year. The sales manager is convinced that an 8% reduction in the selling price, combined with a $24,000 increase in advertising, would cause annual sales in units to increase by one-fourth. Prepare two contribution income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager? Help my contribution income statement, I believe is wrong.
6. Refer to the original data. Assume again that the company sold 20,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.50 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 20%. By how much could advertising be increased with profits remaining unchanged? Do not prepare and income statement; use the incremental analysis approach.
Excel file contains answer of a CVP analysis problem.