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Matthew Moss BUS 202-01 10-28-2010 Assignment 3 6-19

*1. What is the product's CM ratio? *

In order to determine the products CM ratio, I will first need to get the Unit Contribution Margin by taking the total sale price per unit and subtracting the variable cost per unit. Then in order to get the ratio, I will need to take the Contribution Margin, and divide that by the total sales. Per Unit Selling price................................$20 Variable expenses....................... 8 Contribution Margin................... $12 Percent of sales 100% 40% 60% $12 Unit CM / $20 Unit Selling price Product Contribution Margin Ratio = **60%**

*2. Use the CM ratio to determine the break-even point in sales dollars. *

To determine the break-even point in sales dollars, we must take the expected profit (which is zero because we want to find the break-even point) and add that to the fixed expenses, Then divide that all by the Contribution Margin. $0 + $180,000 fixed expenses / 0.6 CM ratio = **$300,000 in sales at Break-Even**

*3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change? *

In order to determine the new values, we plug in an extra $75,000 to the 300,000 from the previous question and we find out that since sales increased, the amount of units sold also increased from 15,000 to 18,750. By taking 18,750 and multiplying that by the variable expenses cost per unit at $8, we get the total Variable Expenses. Subtract the150,000 from Sales and you have the Contribution Margin. And finally subtract the $180,000 fixed expenses to get the new **Net Operating Income increase of $45,000**. Sales................(18,750 units)..375,000 Variable Expenses...................150,000 Contribution Margin...............225,000 Fixed Expenses........................180,000 Net Operating Income.............45,000

*4. Assume the operating results for last year were: Sales........................................400,000 Variable Expenses...................160,000 Contribution Margin...............240,000 Fixed Expenses........................180,000 Net Operating Income.............60,000 a. Compute the degree of operating leverage at the current level of sales. *

To compute the operating leverage, you must take the Contribution Margin and divide it by the Net Operating Income. $240,000 CM / $60,000 Net Op Income **Degree of Operating Leverage = 4**

*b. The President expects sales to increase by 20% next year. By what percentage should net operating income increase? *

Sales........................................480,000 Variable Expenses...................192,000 Contribution Margin...............288,000 Fixed Expenses........................180,000 Net Operating Income.............108,000 400,000 * .2 = 80,000 + 400,000 = $ 480,000 480,000 / 20 = 24,000 units * $8VC per unit = $192,000 480,000 - 192,000 = $288,000 288,000 - 180,000 = $108,000 108,000 / 60,000 = 1.8 or 180% increase The Net Operating Income should increase by **180%**

*5. Refer to the original data. Assume that the company sold 18,000 units last year. The Sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution format income statements, one showing the results of last year's operations and one showing the results of operations if these changes are made. *

Last year's contribution format income statement Total Sales (18,000 units).................... $360,000 Variable expenses.......................144,000 Contribution Margin................... 216,000 Fixed Expenses............................180,000 Net Operating Income................$36,000 Per Unit $20 8 $12 'If changes are made' contribution format income statement Percent of sales 100% 40% 60% Net Operating Income................$76,920 Total Sales (23,940 units).................... $430,920 Variable expenses.......................144,000 Contribution Margin................... 286,920 Fixed Expenses............................210,000 Per Unit $18 8 $10 Percent of sales 100% 44% 56% Would you recommend that the company do as the sales manager suggests?? If sales did increase by one-third, then I would recommend the sales managers suggestion which would greatly increase the Net Operating income of the company by $46,920

*6. Refer to the original data. Assume that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? Do not Prepare an income statement; use the incremental analysis approach. *

To keep profits the same while increasing Fixed costs, You could decrease variable costs to help level out the blow that the extra fixed costs of commission and the advertising would have on Profits. An example of how to reduce variable costs would be to hire cheaper labor or to use cheaper raw materials to make the product. For an exact amount of how much could ads be increase with profits staying the same, You must figure out the Variable costs which is 18,000 units * $8 VC per unit= $144,000.