Problem 3

WinterSports Company revenues and cost data for 2020 are presented in the following gross margin format:

Revenues Cost of goods sold (all variable costs) Gross Margin Operating costs: Salaries fixed Sales commissions (20% of sales) Depreciation of equipment Store rent ($5,000 per month) Other operating costs* Operating income (loss)

$120,000 160,000 20,000 60,000 80,000

$800,000 320,000 480,000 440,000 $40,000

*An analysis of other operating costs reveals that it includes $64,000 variable costs, which vary with sales volume, and $16,000 fixed costs.

Required (show your work)

1. Compute (i) the (total) contribution margin and (ii) the contribution margin percentage.
2. Compute the sales revenue required to achieve an operating profit of $60,000.
3. Calculate operating leverage at the current ($800,000) level of sales revenue. Explain how you would use this measure of operating leverage.
4. The manager of WinterSports estimates that units sold (and hence revenues) will increase by 20% if additional advertising costs of $15,000 are incurred. Calculate the impact on operating income of incurring the additional advertising costs.