Cost Volume Profit Relationships

Advance Company distributes a light weight lawn chair that sells $30.00 per unit. Variable Expenses are

$12.00 per unit and fixed expenses total $360,000 annually.

Required:

1. What is the product's CM ratio?

2. Use the CM ratio to determine the break-even point in sales dollars?

3. The company estimates that sales will increase by $90,000 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 $ 720,000

Variable expenses $ 288,000

Contribution Margin $ 432,000

Fixed Expenses $ 360,000

Net Operating income $ 72,000

a) Compute the degree of operating leverage at the current level of sales.

b) The president expects sales to increase by 30% next year. By how much should net operating

income increase?

5. Refer to the original data. Assume that the company sold 56,000 units last year. The sales

manager is convinced that a 20% reduction in the selling price combines with a $140,000 increase

in advertising expenditures, would increase annual unit sales by 50%. Prepare two contribution

format income statements, one showing the results for last year operations and one showing what

the results of operations would be if these changes were made. Would you recommend that the

company the Sales Manager suggests?