McDuffy’s, Inc., has developed a chew-proof dog bed—the McTuffie. Fixed costs are

$144,000 per year. The average price for the McTuffie is $32, and the average variable cost is $24 per unit. Currently, McDuffy produces and sells 20,000 McTuffies.

Required:

1. How many McTuffies must be sold to break even?

2. If McDuffy wants to earn $46,000 in profit, how many McTuffies must be sold?

Prepare a variable-costing income statement to verify your answer.

3. Suppose that McDuffy would like to lower the break-even units to 12,000. The company does not believe that the price or fixed cost can be changed. Calculate the new unit variable cost that would result in break-even units of 12,000.

4. What is McDuffy’s current contribution margin and operating income? Calculate the degree of operating leverage (round your answer to two decimal places). If sales increased by 10 percent next year, what would the percent change in operating income be? What would the new total operating income for next year be?

LO1