Chapter 6 1. A merchandising company has provided the following contribution format income statement: Sales (10,000 units) 5 700,000 Variable expenses 350,000 Contribution margin 350,000 Fixed expenses 85,000 Net operating income $ 265,000 What is the total contribution margin? (Hint: amount is given) (1 point) What is the unit contribution margin? Show your calculations. (1 point) (Hint: Total CMumber of units) 2. A company sells a single product at a price of $20 per unit. Variable expenses are $12 per unit. The company's contribution format income statement for the most recent month follows: Total Per Unit Sales (15,000 units) $300,000 $20 Variable expenses 180,000 g Contribution margin 120,000 $8 Fixed expenses 100,000 Net operating income $20,000 If the company sells 16,500 units next month, what should be the company's total contribution margin? Show your calculations. (2 points) Suggested approach: Total number of units sold x Unit CM Page 1 3. Citrus Company sells a single product, a juicing machine. The selling price is $180 per unit; variable expenses are $100 per unit, and total fixed expenses are $35,000. What is the contribution margin ratio? Show your calculations. (1 point) 4. Data concerning a company's single product appear below. Per Unit % of Sales Selling price S 200 100% Variable expenses S 120 60% Contribution margin S 80 40% The company is currently selling 1,000 units per month. Fixed expenses are $50,000 per month. The marketing manager believes that a $3,000 increase in the monthly advertising budget would result in a 200 unit increase in monthly sales. What should be the overall effect on the company's net operating income if this change is made? Show your calculations. (2 points) Suggested approach: we do not need to know the total net operating income, just the change in the net operating income. Compute the change in CM by additional number of units x unit contribution margin [given]. Subtract the increase in advertising, a fixed expense. The result is the effect on net operating income. 5. Data concerning a company's only product appear below: Selling price per unit S 70 Variable expense per unit $ 35 Fixed expenses per month $85,000 How many units must be sold to attain a monthly target profit of $300,000? Show your calculations. (1 point) 6. A company's margin of safety is $50,000. If the company's sales drop by $60,000, will it will have net income or a net loss? (1 point) 7. Data about a company's single product appears below: Selling price per unit $ 150.00 Variable expense per unit $ 60.00 Fixed expense per month S 120,000 What is the break-even point in dollar sales? Show your calculations. (1 point) Page 2 8. A company sells a single product at a selling price of $40 per unit. Variable expenses are $20 per unit and total fixed expenses are $20,000. What are the unit sales needed to break even? Show your calculations. (1 point) 9. The contribution margin ratio of a company's only product is 40%. The company's monthly fixed expense is $210,000 and the company's monthly target profit is $40,000. How many sales dollars are needed to attain that target profit? Show your calculations. (1 point) 10. A company's degree of operating leverage is 1.6. If sales increase by 3%, what would be the expected percentage increase in the company's net operating income? Show your calculations. (1 point) 11. A company that products and sells a single product has provided the following contribution format income statement: Sales (5,000 units) $100,000 Variable expenses 60,000 Contribution margin 40,000 Fixed expenses 12,000 Net operating income $ 28,000 If the company sells 4,900 units next month, what should its new net operating income be? Show your calculations. (2 points) Suggested approach: Start with current net operating income; then compute the difference in number of units currently sold and the number of units to be sold next month [in this case, 5,000 4,900 = 100 fewer units]; multiply this number by unit CM [have to compute unit CM by taking total CM/til of units]; if fewer units are sold, subtract from current net operating income. If more units are sold, add the amount to the current net operating income. 12. A company sells a product for $60 per unit. The product's current sales are 20,000 units and its break-even sales are 19,000 units. What is the margin of safety in dollars? Show your calculations. (1 point) Page 3