OPERATING AND FINANCIAL LEVER

ASSIGNMENT 6-MODULE 8

PROBLEM 1 (Computing and using the CM ratio)

Given: Requirement 1:
Units sold 50,000 What is the company's contribution margin (CM) ra
Sales 200,000
Variable Expenses 120,000 Solution:
Fixed Expenses 65,000
Sales 200,000
Variable Expenses (120,000)
Contribution Margin 80,000
Fixed Expenses (65,000)
Net Operating Income 15,000

Requirement 2:
Estimate the change in the company's net operatin

Solution:

Estimated change in sales 1,000

Multiply by: CM ratio 40%
Estimated change in 400
Net Operating Income

Present
Sales 200,000
Variable Expenses (120,000)
Contribution Margin 80,000
Fixed Expenses (65,000)
Net Operating Income 15,000

PROBLEM 2 (Compute the Break-even point)

Given: Requirement 1:
Selling Price 15 per unit Solve for the company's break-even point in unit sa
Variable Expense 12 per unit
Fixed Expense 4,200 Solution:
Selling Price 15 per unit
Variable Expense (12 per unit)
Contribution Margin 3 per unit
Fixed Expense 4,200

Requirement 2:
Solve for the company's break-even point in sales p

Solution:

Selling Price 15 per unit x 1,400 units

Variable Expense (12 per unit) x 1,400 units
Contribution Margin 3 per unit x 1,400 units
Fixed Cost
Net Operating Income

PROFIT= CM Ratio x Sales -Fixed Expenses

0=0.20 x Sales - 4,200
0=0.20Sales - 4,200
0.20Sales = 4,200
0.20Sales = 4,200/ .20
SALES= 21,000

Requirement 3:
Solve for the company's break-even point in unit sa

Solution:
Selling Price 15 per unit
Variable Expense (12 per unit)
Contribution Margin 3 per unit
Fixed Expense 4,200

Requirement 4:
Solve for the company's break-even point in sales p

Solution:

Selling Price 15 per unit x 1,400 units

Variable Expense (12 per unit) x 1,400 units
Contribution Margin 3 per unit x 1,400 units
Fixed Cost
Net Operating Income
PROBLEM 3 (Compute the Margin of Safety)

Given: Requirement 1:
Selling Price 30 per unit Compute the company's Margin of Safety.
Variable Expenses 20 per unit Solution:
Fixed Expenses 7,500 Break-Even Point Sales
Unit sales 1,000 units PROFIT= (Selling Price- Variable Cost) x Quantity - Fixed Cost
0=(30-20) x Q - 7,500
0=10Q - 7,500
10Q=0+ 7,500
10Q/ 10= 7,500/ 10
Q= 750 units

Break-even Units 750 units

Selling Price x 30 per unit
Break-even (Sales) 22,500

Requirement 2:
Compute the company's Margin of Safety as a perc

Solution:

Margin of Safety (Percentage) = Margin of Safety (pesos) / Sales

MOS= 7,500.00 / 30,000
MOS= 0.25 or 25%

PROBLEM 4 (Compute and use the Degree of Operating Leverage)

Given: Requirement 1:
Selling Price 80,000 100% Compute the company's degree of operating levera
Variable Expenses 32,000 40%
Contribution Margin 48,000 60% Solution:
Fixed Cost 38,000
Net Operating Income 10,000 Degree of Operating Leverage = Contribution Margin / Net Operating Income
DOL =48,000 / 10,000
DOL= 4.8 x

Requirement 2:
Using the degree of operating leverage, estimate th
 net operating income of a 5% increase in sales.

Solution:

Estimated increase in Sales 5%

Multiply by: DOL 4.8 x
Estimated change in Net 0.24 or 24%
Operating Income

Requirement 3:
Verify your estimate from part (2) above by constru

Solution:

Sales 80,000
Multiply by: Increase in 5%
Percentage
Total Additional Sales 4,000

Variable Cost 32,000

Multiply by: Increase in 5%
Percentage
Total Additional Variable 1,600
Cost
 PERATING AND FINANCIAL LEVERAGE

pany's contribution margin (CM) ratio?

Contribution Margin Ratio = Contribution Margin / Sales

CM Ratio= 80,000 / 200,000
CM Ratio= 40%

nge in the company's net operating income if it were to increase its total sales by 1,000.

Sales 200,000
Divide by: Units sold 50,000
Unit Cost 4 per unit

Expected
Sales 201,000 (200,000+1,000)
Variable Expenses (120,600) (120,000+600)
Contribution Margin 80,400
Fixed Expenses (65,000)
Net Operating Income 15,400 (15,000+400)

mpany's break-even point in unit sales using the equation method.

PROFIT= (Selling Price- Variable Cost) x Quantity - Fixed Cost

 0=(15-12) x Q - 4,200
0=3Q - 4,200 Break-Even Point (Units) = Total Fixed Cost/ Contribution Margin per unit
3Q=0+ 4,200 BEP= 4,200 / 3 per unit
3Q/ 3= 4,200/ 3 BEP= 1,400 units
Q= 1,400 units Break-even units

mpany's break-even point in sales pesos using the equation method and the CM ratio.

= 21,000
= (16,800)
= 4,200
= (4200) Contribution Margin Ratio = Contribution Margin / Sales
0 CM Ratio= 4,200 / 21,000
CM Ratio= 20%

Break-Even Point (Pesos) = Total Fixed Cost/ Cost Margin Ratio

BEP= 4,200 / 0.2
BEP= 21,000.00

mpany's break-even point in unit sales using formula method.

Unit sales to attain Break-even Point= Fixed Cost / Contribution Margin per unit
BEP= 4,200 / 3 per unit
BEP= 1,400 units

mpany's break-even point in sales pesos using formula method and the CM ratio.

Contribution Margin Ratio = Contribution Margin / Sales

CM Ratio= 4,200 / 21,000
= 21,000 CM Ratio= 20%
= (16,800)
= 4,200 Total Sales to attain Break-even Point= Fixed Cost / Contribution Margin Ratio
= (4200) BEP= 4,200 / 20%
0 BEP= 21,000.00
mpany's Margin of Safety.

tity - Fixed Cost Selling Price 30 per unit x 1,000 units

Variable Expenses 20 per unit x 1,000 units
Contribution Margin
Fixed Cost
Net Operating Income

Margin of Safety (pesos) = Total Sales - Break-even Sales

MOS= 30,000 - 22,500
MOS= 7,500.00

mpany's Margin of Safety as a percentage of its sales.

fety (pesos) / Sales

mpany's degree of operating leverage.

n Margin / Net Operating Income

of operating leverage, estimate the impact on

come of a 5% increase in sales.

ate from part (2) above by constructing a new contribution format income statement for the company assuming a 5% increase in sales.

Present
Sales 80,000 100% Sales
Variable Expenses (32,000) 40% Variable Expenses
Contribution Margin 48,000 60% Contribution Margin
Fixed Expenses (38,000) Fixed Expenses
Net Operating Income 10,000 Net Operating Income

Net Operating Income reflecting changes in Sales 12,400

Original Operating Income (10,000)
Change in Net Operating Income 2,400
Divided by:
Original Operating Income 10,000
Percent Change in Net Operating Income 0.24 or 24%
Increase in Sales 1,000
Divide by: Unit Cost 4
Additional Units 250 units

Variable Expense 120,000

Divide by: Units sold 50,000
Unit Cost 2.4 per unit

Additional Units 250 units

Multiply by: Unit Cost 2.4
Additional Variable 600
Expense
ntribution Margin per unit

bution Margin Ratio

= 30,000
= (20,000)
10,000
(7,500)
2,500
ny assuming a 5% increase in sales.

Expected
84,000 (80,000+4,000) 100%
(33,600) (32,000+1,600) 40%
50,400 60%
(38,000)
12,400 (10,000 + 2,400)