The following is Alsatia Corporation's contribution format income statement for last month: The company has no beginning or ending inventories and produced and sold 10,000 units during the month.
a. What is the company's contribution margin ratio? b. What is the company's break-even in units? c. If sales increase by 100 units, by how much should net operating income increase? d. How many units would the company have to sell to attain target profits of $225,000? e. What is the company's margin of safety in dollars? f. What is the company's degree of operating leverage?
CM ratio CM ratio = Contribution margin Sales = $500,000 $1,400,000 = 0.357
. Break-even units Unit sales to break even = Fixed expenses/Unit CM = $300,000/($140-$90) = $300,000/$50 = 6,000 units
. Increase in net operating income from additional sales of 100 units
. Unit sales to attain target profit = (Target profit + Fixed Expenses)/Unit CM = ($225,000+$300,000)/$50 = 10,500 units
Margin of safety in dollars Break-even sales = $140 per unit x 6,000 units = $840,000 Margin of safety in dollars = Sales - Break-even sales = $1,400,000 - $840,000 = $560,000
Degree of operating leverage = Contribution margin Net operating income = $500,000 $200,000 = 2.5