Exercise 3.35: Target Profit, Margin of Safety, Operating Leverage, Contribution Margin,and Gross Margin

The following budget data apply to Newberry's Nutrition:

Sales (100,000 units) $1,000,000

Costs

Direct materials $300,000

Direct labor $200,000

Fixed factory overhead $100,000

Variable factory overhead $150,000

Marketing and administration $160,000

Total costs $910,000

Budgeted pre-tax income $90,000

Direct labour workers are paid hourly wages and go home when there is no work. The marketingand administration costs include $50,000 that varies proportionately with production volume.Assume that sales and production volumes are equal.

A.Compute the number of units that must be sold to achieve a target after-tax incomeof $120,000, assuming a tax rate of 40%.

B.Calculate the margin of safety in both revenues and units.

C.Calculate the degree of operating leverage.

D.Prepare Newberry's Nutrition income statements in contribution margin format and grossmargin format