1 Chapter 5: Applying Excel 2 3 Data 4 Unit sales 20,000 units 5 Selling price per unit $60 per unit 6 Variable expenses per unit $45 per unit 7 Fixed expenses $240,000 8 9 Enter a formula into each of the cells marked with a ? below 10 Review Problem: CVP Relationships 11 12 Compute the CM ratio and variable expense ratio 13 Selling price per unit $60 per unit 14 Variable expenses per unit 45 per unit 15 Contribution margin per unit $15 per unit 16 17 CM ratio 25% 18 Variable expense ratio 75% 19 20 Compute the break-even 21 Break-even in unit sales 16,000 units 22 Break-even in dollar sales $960,000 23 24 Compute the margin of safety 25 Margin of safety in dollars $240,000 26 Margin of safety percentage 20% 27 28 Compute the degree of operating leverage 29 Sales $ 1,200,000 30 Variable expenses 900,000 31 Contribution margin 300,000 32 Fixed expenses $240,000 33 Net operating income $ 60,000 34 35 Degree of operating leverage 5.00 Required: 1. Check your worksheet by changing the fixed expenses to $270,000. If your worksheet is operating properly, the degree of operating leverage should be 10. If you do not get this answer, find the errors in your worksheet and correct them. How much is the margin of safety percentage? Did it change? Why or why not? 2. Enter the following data from a different company into your worksheet: Unit sales 10,000 Selling price per unit $120 Variable expenses per unit $72 Fixed expenses $420,000 What is the margin of safety percentage? What is the degree of operating leverage? 3. Using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 15%. 4. Confirm the calculations you made in part (3) above by increasing the unit sales in your worksheet by 15%. What is the new net operating income and by what percentage did it increase? 5. Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $10,000 and at that price, Thad estimates that he could sell 600 units each year. The variable cost to produce and sell the cycles would be $7,500 per unit. The annual fixed cost would be $1,200,000. a. Using your worksheet, what would be the unit sales to break even, the margin of safety in dollars, and the degree of operating leverage? b. Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $9,000 to compete effectively. In that event, Thad also would reduce fixed expenses by $300,000 by reducing advertising expenses, but he still hopes to sell 600 units per year. Do you think this is a good plan? Explain. Also, explain the degree of operating leverage that appears on your worksheet