Question
ASD Company revenues and cost data for 2020 are presented in the following gross margin format: Revenues 800,000 Cost of goods sold (all variable costs).
ASD Company revenues and cost data for 2020 are presented in the following gross margin format:
Revenues 800,000
Cost of goods sold (all variable costs). 320,000
Gross Margin 480,000
Operating costs:
Salaries fixed 120000
Sales commissions (20% of sales). 160000
Depreciation of equipment. 20000
Store rent ($5,000 per month). 60000
Other operating costs* 80000 440000
Operating income (loss) 40000
*An analysis of other operating costs reveals that it includes $64,000 variable costs, which vary with sales volume, and $16,000 fixed costs.
Required (show your work)
a)Compute (i) the (total) contribution margin and (ii) the contribution margin percentage. (6 points)
b)Compute the sales revenue required to achieve an operating profit of $60,000. (4 points)
c)Calculate operating leverage at the current ($800,000) level of sales revenue. Explain how you would use this measure of operating leverage. (5 points)
d)The manager of ASD estimates that units sold (and hence revenues) will increase by 20% if additional advertising costs of $15,000 are incurred. Calculate the impact on operating income of incurring the additional advertising
costs. (5 points)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
a To compute the total contribution margin and the contribution margin percentage we need to calculate the total variable costs and the contribution m...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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