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    Calculating CM Ratio, breakeven sales and operating leverage

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    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.

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    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.