Networks Company manufactures wireless routers. The companys contribution format income statement for the most recent year is given below: Total Per Unit Percentage of Sales Total Per Unit Percentage of Sales Sales (25,000 units). . . . . . . . . . . . $2,500,000 $100 100% Less variable expenses . . . . . . . . . 1,500,000 60 __ ? %_ Contribution margin. . . . . . . . . . . . 1,000,000 $ 40 ? % Less fixed expenses . . . . . . . . . . . . . 800,000 Operating income . . . . . . . . . . . . . . . $ 200,000 Management believes operating income can be further improved and would like you to prepare the following analysis. Required:

1. Compute the companys Contribution Margin Ratio (2 marks)

2. Variable Expense Ratio. (3 marks)

3. Compute the companys break-even point in units. (2 marks)

4. Compute the companys break-even point in sales dollars. (2 marks)

5. Assume that sales increase by $600,000 next year. If cost behaviour patterns remain unchanged, by how much will the companys operating income increase? Use the CM ratio to determine your answer. (3 marks) Refer to the original data to answer Question 6.

6. Assume that next year, management wants the company to earn minimum profit of $500,000. How many units will have to be sold to meet this target profit figure? (3 marks) Refer to the original data to answer Questions 7 and 8.

7. Compute the companys margin of safety in dollars. (3 marks)

8. Compute the companys margin of safety in percentage form. (3 marks) Refer to the original data to answer Questions 9 to 11.

9. Compute the companys degree of operating leverage at the current level of sales. (3 marks)

10. Assume that, through a more intense effort by the sales staff, the companys sales will increase by 12% next year. By what percentage would you expect operating income to increase? Use the operating leverage concept to obtain your answer. (3 marks)

11. Compute the companys new sales in units. (3 marks) Use the information below to answer Questions 12 through 14. In an effort to increase sales and profits, management is considering using a higher- quality microprocessor in the router. The higher-quality microprocessor would increase variable costs by $8 per unit, but management could eliminate one quality inspector, who is paid a salary of $40,000 per year. The sales manager estimates that the higher-quality microprocessor would increase annual sales by at least 10%.

12. Compute the companys new break-even point in units of sales. (3 marks)

13. Compute the companys new break-even point in dollars of sales. (3 marks)

14. Would you recommend that the changes be made? Why or why not? (4 marks)