Cost Volume Profit Analysis

Daniels Company manufactures and sells a specialized cordless telephone for high electromagnetic radiation environments. The companys contribution format income statement for the most recent year is given below:

	Total	Per Unit
Sales (20,000 units)	$1,200,000	$60
Variable expenses	$900,000	$45
Contributiton margin	$300,000	$15
Fixed expenses	$240,000
Net operating income	$60,000

Required:

1. Compute the companys break-even point in both units and sales dollars.

2. Refer to the original data. Assume next year management wants the company to earn a profit of at least $90,000. How many units will have to be sold to meet this target profit?

3. Refer to the original data. Compute the companys margin of safety in both dollar and percentage form.

4. a. Compute the companys degree of operating leverage at the present level of sales.

b. Assume that through a more intense effort by the sales staff, the companys sales increase by 8% next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.

5. In an effort to increase sales and profits, management is considering the use of a higher-quality speaker. The higher-quality speaker would increase variable costs by $3 per unit, but management could eliminate one quality inspector who is paid a salary of $30,000 per year. The sales manager estimates that the higher-quality speaker would increase annual sales by at least 20%. Compute the companys new net operating income.