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Solution
Solution
4,400,000
3,608,000
Contribution margin
792,000
450,000
Net income
342,000
Year 2016
Sales
4,840,000
871,200
450,000
Net income
421,200
Year 2017
Sales
5,324,000
958,320
450,000
Net income
(b) Operating leverage
508,320
2015
(4,400,000-3,608,000)/((4,400,000-3,608,000)-450,000)=2.32
2016
(4,840,000-3,968,800)/((4,840,000-3,968,800)-450,000)=2.07
2017
(5,324,000-4,365,680)/((5,324,000-4,365,680)-450,000)=1.89
Margin of safety
2015
=(4,400,000-2,500,000)/4,400,000=43.18%
2016
=(4,840,000-2,500,000)/4,840,000=48.35%
2017
=(5,324,000-2,500,000)/5,324,000=53.04%
4,600,000
2,760,000
Contribution margin
1,840,000
1,700,000
Net income
140,000
Year 2016
Sales
5,290,000
2,116,000
1,700,000
Net income
416,000
Year 2017
Sales
6,083,500
2,433,400
1,700,000
Net income
733,400
=(5,290,000-4,250,000)/5,290,000=19.66%
2017
=(6,083,500-4,250,000)/6,083,500=30.14%
3,200,000
2,624,000
Contribution margin
576,000
450,000
Net income
126,000
3,200,000
1,920,000
Contribution margin
1,280,000
1,700,000
Net income
-420,000
Profit=12%
Fixed cost=1,700,000=28%
Therefore, sales=6,071,429
The sales level will be reached on the year 2017.
The risk of loss increases due to higher break even point for the company.
The profitability may take a hit due to lower margin of safety in
comparison to old plant.
There is an opportunity cost associated in case company miss the market.
(ii)