Cost-Volume-Profit Analysis Case

The Voltar Company manufactures and sells a special wireless telephone for environments with a high level of electromagnetic radiation.

Below is the Statement of Income and Expenses in contribution margin format for the most recent year:

TotalPer unitPercentage of salesSells (20,000 units)$1,200,000$60100%Variables costs900,00045?%Contribution margen 300,000$15?%Fixed costs240,000Operational net income $60,000

Required:

1. Calculate the contribution margin percentage and the variable cost percentage.

2. Calculate the breakeven point, both in units and sales dollars.

3. Suppose that the following year there is a $400,000 increase in sales. If cost behavior patterns do not change, by how much will the company's net operating income increase? Use the contribution margin percentage as the basis for your answer.

4. Review the original data. Suppose management wants the company to make at least $90,000 in profit the following year. How many units must be sold to reach the expected profit (target profit)?

5. Review the original data. Calculate the margin of safety in dollar form and in percentage form.

6.

a. Calculate the degree of operating leverage of the company (operating leverage) for the current level of sales.

b. Suppose that, through some effort on the part of the sales department, sales increase by 8% the following year. By what percentage would you expect net operating income to increase? Use the degree of operational leverage to get your answer.

c. Verify your answer to the previous question by preparing a new Statement of Income and Expenses in contribution margin format showing an 8% increase in sales.

7. As part of an effort to increase company sales and profits, management is considering the use of a higher quality speaker. This loudspeaker would increase variable costs by $3 per unit, but management could eliminate a quality inspector who is paid $30,000 per year. The sales manager estimates that the best quality loudspeaker would increase annual sales by at least 20%.

a. Suppose the changes described above are to be carried out. Prepare a Statement of Income and Expenses with a contribution format for the following year. It shows the total data, by unit and in percentage.

b. Calculate the new break-even point in units and in sales dollars.

c. Would you recommend these changes be made? Explain.