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Problem# 5-20
Req: 1(a)
CMR = (CM/Sales) X 100
Here CM = Sales - Variable cost = $25 ---- 15 = 10
CMR = (10/25) X 100 = 40%
Break Even point in Balls = Fixed cost/ CMPU here CMPU = Sales price PUVC PU = 25 – 15 =10
Fixed cost
So, Break Even Point in balls 2,10,000/10 = 21,000 Balls
Break even points in $ = Fixed Cost/CMR = 2,10,000/.40 = $5,25,000
(b) Degree of operating leverage (DOL) = Contribution margin/ Net operating
profit
Here, Contribution margin = 3,00,000
Net operating profit = 90,000
So, DOL = 3,00,000/90,000 = 3.33 times ( If sales increase by 1%,
correspondingly operating profit will increase by 3.33%)
Req.2
New variable cost = 15 + 3 = 18
New Contribution margin = 25 ---- 18 = 7
So, CMR = (Contribution / Sales) X 100 = (7/25) X 100 = 28%
Break Even point in balls = 2,10,000/7 = 30,000 balls
Req: 3
Targeted profit =
Assume that company has to sold Q units in order to earn profit $90,000
25Q – 18Q -2,10,000 = 90,000
Or 25Q – 18Q = 3,00,000
= 7Q = 3,00,000
Q = 3,00,000/7 = 42,857.14 or 42,857 balls.
Req: CMR = Contribution = Sales price --- Variable cost
CMR = (Sales price --- Variable cost/ Sales) X 100
Here variable cost = $18
CMR = .40
Sales price= ?
Assume that Selling price is SP
Now we put the values into the formula and get
SP --- 18
--------------------------------------- = .40
SP
= .40 SP = SP ---- 18
= .60SP =
=SP =
18
18/.60 = $30
Req: 5
New variable cost per ball= 15 - 15x40% = 15 – 6 = $9
New fixed cost = 2,10,000 X 2 = 4,20,000
CMR = (CM/Sales) X 100 Here CM = Sales ---- Variable cost = 25 - 9 =16
=
(16/25) X 100 = 64%
Break Even point in Balls =
Fixed cost/ CM = 4,20,000/16 =26,250 balls
Req: 6 (a)
We know that 25Q – 9Q ---- 4,20,000 = 90,000
= 16Q = 90,000 + 4,20,000
= 16Q = 5,10,000
So Q =
5,10,000/16 = 31,875 balls
(b)
Income statement
Sales (30,000 X25)
$ 7,50,000
Less Variable expenses (30,000 X 9)
2,70,000
--------------
Contribution margin
4,80,000
Less Fixed expenses
4,20,000
---------------
Net operating income
$ 60,000
==========
DOL = Contribution margin/Net operating profit
=
4,80,000/60,000 = 8 times
(c) I am not infavor of constructing new plant because it would slash(reduces) the
net operating income from 90,000 to 60,000.
Sales Mix and Break even calculation
Assume that A company has two products X and Y
Company sales X for $20,000 and Y $80,000
Product X has 75% variable expenses and Y has 50%
If fixed cost of the company is $27,000
What would be company’s break- even point in $?
Income Statement
Sales
Variable expenses
Contribution margin
Less Fixed expenses
Net operating income
X
Amoun
%
t
20,000 100%
Y
Amoun
%
t
80,000 100%
15,000
5,000
40,000
40,000
75%
25%
50%
50%
Total
Amount
%
1,00,00
0
55,000
45,000
27,000
$18,000
100%
55%
45%
Break Even points in $ = Fixed expenses/Contribution margin ratio
27,000/.45 =$60,000
In contribution how much will be product X and Y
At contribution margin product X would sales (60,000/100) X 20 = $12,000
At contribution margin product Y would sales (60,000 /100) X 80 =$48,000
Page #237
Problem 5-29
Home work:
Exercise 5-11, 5-13, 5-18, Problem 5-22, 5-23, 5-25, 5-26, 5-30