Basic CVP Concepts

Katayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions projected income statement for the coming year is as follows:

Sales (65,000 units)	$15,600,000
Less: Variable expenses	8,736,000
Contribution margin	$6,864,000
Less: Fixed expenses	4,012,000
Operating income	$2,852,000

Required:

1. Compute the contribution margin per unit, and calculate the break-even point in units. Round unit contribution margin to the nearest cent and break-even point to the nearest whole unit.

Unit contribution margin	$fill in the blank 928947028fa003a_1
Break-even point	fill in the blank 928947028fa003a_2	units

Compute the contribution margin ratio and the break-even point in dollars. Enter the contribution margin ratio as a decimal value rounded to two decimal places, and use this rounded value in the second calculation.

Contribution margin ratio	fill in the blank 928947028fa003a_3
Break-even point (rounded to the nearest dollar)	$fill in the blank 928947028fa003a_4

2. The divisional manager has decided to increase the advertising budget by $140,000 and cut the average selling price to $200. These actions will increase sales revenues by $1 million. Will this improve the division's financial situation?

Prepare a new income statement to support your answer. In your calculations, round the variable cost ratio to three decimal places.

Katayama Company
Income Statement
	$fill in the blank acaf13fab030fcb_2
	fill in the blank acaf13fab030fcb_4
	$fill in the blank acaf13fab030fcb_6
	fill in the blank acaf13fab030fcb_8
	$fill in the blank acaf13fab030fcb_10

3. Suppose sales revenues exceed the estimated amount on the income statement by $612,000. Without preparing a new income statement, determine by how much profits are underestimated. $fill in the blank 35a228f9106bfb0_1

4. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. Round your answer to the nearest whole unit. fill in the blank 35a228f9106bfb0_2 units

5. Compute the margin of safety in dollars based on the given income statement. Round your answer to the nearest dollar. $fill in the blank 35a228f9106bfb0_3

6. Compute the operating leverage based on the given income statement. Round your answer to three decimal places. Use the rounded answer in the subsequent computation. fill in the blank

If sales revenues are 20 percent greater than expected, what is the percentage increase in profits? Round the percentage to two decimal places. fill in the blank