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Chapter 5: Tyrene Products Problem 5-29 Over the past year the company sold 40,000 units of skateboards with the following operating results: Data Sales (40,000) skateboards $1,500,000.00 Variable expenses $900,000 Contribution Margin $600,000 Fixed expenses $480,000 Net operating Income $120,000.00 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards. 1.a. Compute the CM ration and the break even point in skateboards. Contribusion margin Unit sales to break even 40% Good Job 32,000 skateboards

1.b.Compute the degree of operating leverage at last year's level of sales. Degree of operating leverage 5 Good Job

2. Due to an increase in labor rates, the company estimates that variable costs will increase y $3 per skateboard next year. If this change takes place an the selling price per skateboard remains constant at $37.50, what will the new CM ratio and the new break even point in skateboards? Contribution margin Unit sales to break even 32% Good Job 40,000 skateboards

3. Refer to the dat in (2) above. If the expected change in variable costs take place, how many skateboards will have to be sold next year to earn the same net operating income, $120,000 as last year? Number of skateboards 50,000 Good Job

4. Refer again to the data in (2) above. The presidenent has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to mainatain the same CM raio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? Selling price($42.50) 42.5 Good Job

5. Refer again to the orginal data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 40% but it would cause fixed costs to increase by 90%. If the new plant is built, what would the company's new CM ratio and new break-even point in skateboards? Contribution margin (64%) Unit sales to break even 64.00% Good Job 38,000 skateboards

6. Refer to the data in (5) above. a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year? Please be sure to show your work. I cannot tell why you came up with that so Number of skateboards n/r

Page 1 year the company manufactures and sells 40,000 skateboards 6. b-1. Assume that the new plant is constructed and that next as positive values except losses which should be indicated by minus sign.

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Contribution Income Statement Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss)

1,500,000 540,000 960,000 912,000 -48,000 I am not sure why you made this a loss. According to your numbers it would b

b.2. Compute the degree of operating leverage Degree of operating leverage 20 Good Job

c.If you were a member of top management, would you have been in favor of constructing the new plant? Explain.

No, I would not be in favor of it due to not only does the contribution margin go up but also the variable expenses, fixed expenses and To me it seems like a waste of money for the company and being out those expenses for the same amount of sales is not profitable. I would be more prone to use any extra money for something that would bring more business such as advertising which would increase sales and then perhaps building another factory to produce more would then be feasible. With the change of the loss, would that change your mind on the plant?

Michael, Overall you did a good job. Please be sure to always show your work. If there is ever a wrong answer, I can provide credit with the atte and be able to provide feedback as to what went wrong. 42 out of 50 points (8 points deducted for the errors) Respectfully, Mrs. Garcia

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ng results:

rom the skateboards.

ncrease y $3 per skateboard next year.

ow many 120,000

y may have to same CM raio as last year, or costs?

new, automated plant.

nd new

arn the same

I cannot tell why you came up with that so I am not able to respond with what should have been done

nufactures and sells 40,000 skateboards (the same number asPage sold 3 last year.) Prepare a contribution format income statement. (Inp

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loss. According to your numbers it would be net operating income, but not at a loss.

ucting

the variable expenses, fixed expenses and there is a $48,000 dollar loss on the net operating income. he same amount of sales is not profitable. ss such as advertising uld then be feasible.

ng answer, I can provide credit with the attempt

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me statement. (Input all amounts

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