Singh Co. reports a contribution margin of $960,000 and fixed costs of $720,000. (1) Compute the company’s degree of operating leverage. (2) If sales increase by 15%, what amount of income will Singh Co. report?
Degree of operating leverage: 4.0
Income before tax: $384,000
The calculation that reflects the degree to which the profit of the business entity can be increased by increasing the revenue of the business entity is known as operating leverage.
New contribution margin @115% of $960,000
Less: Fixed cost
Income before tax
Note: An increase in sales will increase the contribution margin by 15%.
Each of two similar companies has sales of $20,000 and total costs of $15,000 for a month. Company A’s total costs include $10,000 of variable costs and $5,000 of fixed costs. If Company B’s total costs include $4,000 of variable costs and $11,000 of fixed costs, which company will enjoy more profit if sales double?
Nombre Company management predicts $390,000 of variable costs, $430,000 of fixed costs, and a pretax income of $155,000 in the next period. Management also predicts that the contribution margin per unit will be $9. Use this information to compute the (1) total expected dollar sales for next period and (2) number of units expected to be sold next period.
Aces Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. Each racket was sold at a price of $90. Fixed overhead costs are $78,000, and fixed selling and administrative costs are $65,200. The company also reports the following per unit costs for the year. Prepare an income statement under absorption costing.
Variable production cost
Variable selling and administrative expenses
The following costs result from the production and sale of 12,000 CD sets manufactured by Gilmore Company for the year ended December 31, 2017. The CD sets sell for $18 each. The company has a 25% income tax rate.
Variable manufacturing costs
Plastic for CD Sets
Wages of assembly workers
Variable selling cost
Fixed manufacturing cost
Rent on factory
Factory cleaning services
Factory machine depreciation
Fixed selling and administrative cost
Lease of office equipment
System staff salaries
Administrative management salaries
1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.
3. Interpret the contribution margin and contribution margin ratio from part 2.
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