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Calculating CM Ratio, breakeven sales and operating leverage

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Refer data given below:

MARJOLEIN & CO.

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.

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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.

Solution Preview

Please refer attached file for better clarity and template provided.

Solution:

1. Variable Cost=$6
Price=$20
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 ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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