383 Cost-Volume-Profit Relationships Problems connect PROBLEM 8-1 excel CHECK FIGURE (2) Break-even: 22,000 units Performing Basic CVP Analysis (L01 - CC4: LO2- CC6, 7, 10) Stratford Company distributes a lightweight lawn chair that sells for $15 per unit Variable expenses are 40% of sales, and fixed expenses total $198,000 annually. Required: Answer the following independent questions: 1. What is the product's CM per unit? 2. Use the CM per unit to determine the break-even point in units. 3. The company estimates that sales will increase by $45,000 during the coming year due to increased demand. By how much should net operating income increase? 4. Assume that the operating results for last year were as follows: Sales Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income $360,000 144,000 216,000 198,000 $ 18,000 a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 15% next year. By how much should net operating income increase? 5. Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $60,000 increase in advertising expenditures, would increase annual unit sales by 50%. Prepare two contribution format income statements: one showing the results of last year's operations, and one showing what the results of operations would be if these changes were made. Would you recommend that the company do as the sales manager suggests? 6. Refer to the original data. Assume again that the company sold 28,000 units last year. The president feels that it would be unwise to change the selling price. Instead, she wants to increase the sales com- mission by $2 per unit. She thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. Review Problem 1: CVP Relationships Voltar Company manufactures and sells a wireless router signal booster. The company's contribution margin jecome statement for the most recent year is given below: Total Per Unit Percentage of Sales 100 Sales (20,000 units) Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income $1,200,000 900,000 300,000 240,000 $ 60,000 $60 45 S15 || Management is anxious to improve the company's profit performance and has asked for an analysis of a number of items. 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 $400,000 next year. If cost behaviour patterns remain unchanged, by how much will the company's net 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 $90,000. How many units will have to be sold to meet this target profit figure