Purchase Solution

# Break-Even & Target Profit Analysis & Operating Leverage

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6-14 Break-Even and Target Profit Analysis
Super Sales Company is the exclusive distributor for a revolutionary bookbag. The product sells for \$60 per unit and has a CM ratio of 40%. The company's fixed expenses are \$360,000 per year.
Required:

What are the variable expenses per unit?
1. Using the equation method:
a) What is the break-even point in units and in sales dollars?
b) What sales level in units and in sales dollars is required to earn an annual profit of \$90,000?
c) Assume that through negotiation with the manufacturer the Supper Sales Company is able to reduce its variable expenses by \$3 per unit. What is the company's new break-even point in units and in sales dollars?
Repeat (2) above using the contribution margin method.

6-15 Operating Leverage
Superior Door Company sells prehung doors to home builders. The doors are sold for ^60 each. Variable costs are \$42 per door, and fixed costs total \$450,000 per year. The company is currently selling 30,000 doors per year.
Required:

Prepare a contribution format income statement for the company oat the present level of sales and compute the degree of operation leverage.

1. Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25%, over current sales). Compute the following:
2. Prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage.
Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, of 25%, over current sales). Compute the following:
a) The expected percentage increase in net operating income for next year.
b) The expected net operating income for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)

##### Solution Summary

This solution assists in providing a break-even analysis, target profit analysis, and determining operating leverage.

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