MANAGERIAL ACCOUNTING

Assignment: 02

(Break-Even analysis and Operating

Leverage of Voltar manufacturing
company)
Problem:

Voltar Company manufactures and sells a specialized cordless telephone for higher electromagnetic
radiation environments. The company’s contribution format income statement for the most recent year is
given below:
Total Per unit Present of Sales
Sales (20,000Units) $1,200,000 $60 $100
Variable expenses $900,000 $45 ?
Contribution Margin $300,000 $15 ?
Fixed Expenses $240,000
Net Operating Income $60,000

Management is anxious to increase company’s profit and has asked for an analysis of a number of items.

Required:
1. Compute the company’s CM ration and variable expenses ratio.

𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
Variable expense Ratio = ∗ 100
𝑠𝑎𝑙𝑒
$900,000
= ∗ 100
$1,200,000
= $0.75*100
= 75%
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛
Contribution margin Ratio = ∗ 100
𝑠𝑎𝑙𝑒
$300,000
= ∗ 100
$1,200,000
= $0.25*100
= 25%

2. Compute the company’s break-even points in both units and sales dollars. Use the equation method.

Equation method

Profit = sales- variable expense- fixed expense

Sales = variable expense+ fixed expense+ profit (In break-even point profit is 0)
Sales = variable expense+ fixed expense
BE ($)
100% = 75X+$240,000
100%-75X = $240,000
25X = $240,000
X = $9,600
BE (U)
 Sales = variable expense+ fixed expense
$60X = $45X + $240,000
$60X-$45X = $240,000
$15X = $240,000
X = 16,000 Units
3. Assume that sales increase by$400,000 next year. If cost behavior patterns remain unchanged, by
how much will the company’s net operating income increase? Use the CM ratio to compute your
answer.

𝑝𝑒𝑟𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡

C.M =
𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡
$45
C.M = $60 −
$60
$15
C.M =
$60
C.M = $0.25
If sales increase by $400,000
C.M = 0.25*$400,000
C.M = $100,000
If sales increase by $400,000 the net income will be increased by $100,000.

4. Refer to the original data. Assume the next year management wants the company to earn a profit
of at least $90,000. How many units will have to be sold to meet this target profit?

𝑓𝑖𝑥𝑒 𝑐𝑜𝑠𝑡+𝑡𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡

Sale unit =
𝐶.𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

$240,000+$90,000
Sale unit =
15%
$330,000
Sale unit =
0.15

Sale unit = 2,200,000 units

If the company wants to earn profit of $90,000, they need to sell 2,200,000 units to meet the target
profit.

5. Refer to the original data. Compute the company’s degree of operating leverage and find out the
level of profit if company increase the level of sales by 10%.

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
Operating leverage =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
$300,000
Operating leverage =
$60,000
Operating leverage = 5

If the company increases level of sales by 10%.

Expected increase in net income = 10% *5
Expected increase in net income = 50
 Or
Expected increase in net income = 50 *$60,000
Expected increase in net income = $3,000,000

6. In an effort to increases sale and profits, management is considering the use of a higher quality
speaker. The higher-quality speaker would increase variable costs by $3 per unit, by management
could eliminate one quality inspector who is paid a salary of $30,000 per year. The sales manager
estimate that the higher- quality speaker would increase annual sales by at least 20%.
a) Assuming that changes are made as described above, prepare a projected contribution
format income statement for next year. Show data on a total, per unit, and percentage basis.

If sale increase by 20%, 20 %*( 20,000 units) = 4000

Sales = 0.2 *$1,200,000
Sales = $240,000
Variable expense per unit = $45 + $3
Variable expense per unit =$48
$48
Variable expense percent of sale =
$60
Variable expense present of sale = 80%
Fixed expense = $240,000 - $30,000
Fixed expense = $162,000

Contribution Margin Income Statement

Total Per Unit Percent of Sales
Sale (4,000 U) $240,000 60 100%
Variable Expenses ($192,000) 48 80%
Contribution Margin $48,000 $12 20%
Fixed Expenses ($210,000)
Net operating -$162,000
Income

b) Compute the company’s new break-even point in both units and dollars of sales. Use the
contribution margin method.

𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
Break Even (Units) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛

$210,000
Break Even (Units) =
12

Break Even (Units) = 17,500 units

𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
Break Even ($) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜

$210,000
Break Even ($) =
20%
 Break Even ($) = $1,050,000

c) Would you recommend that the changes be made?

Margin of safety ($) = total sale – Break Even sale

Margin of safety ($) = $240,000 - $1,050,000
Margin of safety ($) = (-$810,000)

Margin of safety and Break-even point of Original data.

𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
Break Even ($) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜
$240,000
Break Even ($) =
25%
Break Even ($) = $960,000

Margin of safety ($) = total sale – Break Even sale

Margin of safety ($) = $1,200,000 – 960,000
Margin of safety ($) = $240,000

NO, based on margin of safety and break even points the change should not be made. Because our Margin
of safety will be (-$810,000) and the Break-even point will becomes lower than before.