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Calculating CM Ratio, breakeven sales and operating leverage

Refer data given below:


Unit price $20
Variable cost per unit 6
Annual fixed costs 210,000

Calculate CM Ratio, Contribution margin and breakeven sales.

(3) Estimated sales increase $200,000

Calculate in increase in contribution margin and net operating income.

(4) Operating results last year:
Sales $320,000
Variable expenses 96,000
Contribution margin 224,000
Fixed expenses 210,000
Net operating income $14,000

(4b.) Expected sales increase next year 5%
Calculate degree of operating leverage and increase in net operating income.

(5) Units sold last year 20,000
Reduction in selling price 8%
Increase in advertising expense $24,000
Expected increase in sales 1/4
Make the comparative contribution income statement.

(6) Units sold last year 20,000
Increase in sales commission per unit $1.50
Expected increase in sales 20%
Increase in advertising expense 24000

Calculate incremental Contribution Margin.


Solution Preview

Please refer attached file for better clarity and template provided.


1. Variable Cost=$6
Contribution Margin=(Price-Variable Cost)=20-6=$14
CM Ratio=CM/Price =14/20=0.70

2. Fixed Costs=$210,000
CM Ratio=0.70
Breakeven Sales=Fixed Cost/CM Ratio=210000/0.7=$300,000

3. Increase in Sales=$200,000
CM ratio=70%
Increase ...

Solution Summary

The solution describes the steps for calculating contribution margin, CM ratio, break even sales and degree of operating leverage. It also makes comparative contribution income statement.