1:14 U CVP Analysis.pdf Fade 22.000 Weed-overage CM (08x285) + loa x 2.0) 3.600 unit Problems 29 Networks Company manufactures wireless routers. The company's contribution format income statement for the most recent year is given below: Total Der Unit Percentage of Sales Sales (25.000 units)... $2.500.000 $20 100% Less variable expenses. 1500000 60 Contribution margin 1000000 $ 40 ?% Less foedspenses 800000 Operating income 200.000 Management believes operating income can be further improved and would like you to prepare the following analysis, Required: 1. Compute the company's CM ratio and variable expense ratio. 2. Compute the company's break-even point in both units and sales dollars. Use the equation method. 3. Assume that sales increase by $600,000 next year. If cost behaviour patterns remain un- changed. by how much will the company's operating income increase? Use the CM ratio to determine your answer 4. Refer to the original data. Assume that next year management wants the company to earn a minimum profit of $500.000. How many units will have to be sold to meet this target profit figure? 5. Refer to the original data. Compute the company's margin of safety in both dollar and percentage form. & Compute the company's degree of operating leverage at the current level of sales. Assume that through a more intense effort by the sales staff the company's sales increase by 12% next year. By what percentage would you expect operating income to increase? Use the operating leverage concept to obtain your answer. Verify your answer to (b) by preparing a new income statement showing a 12% increase in sales. 7 In an effort to increase sales and profits management is considering using a higher-quality microprocessor in the router. The higher quality microprocessor would increase variable costs by 58 per unit. but management could eliminate one quality inspector who is paid a salary of $40.000 per year. The sales manager estimates that the higher-quality micropro- cessor would increase annual sales by at least 10% Assuming that changes are made as described above. prepare a projected income statement for next year. Show data on a total per unit and percentage basis. b Compute the company's new break-even point in both units and dollars of sales. Use the formula method. Would you recommend that the changes be made? Why or why not? 6. c