Pronghorn, Inc. manufactures souvenirs and sells the products to souvenir shops across Canada. Lisa McKay is the new owner, and is concerned about the low margins. She would like to find a way to improve the companys profitability. The accountant provides her the following financial information: sales are $217,000, of which 70% is cost of goods sold. Cost of goods sold consists of direct materials (20%), direct labour (30%), and fixed manufacturing overhead (50%). Operating expenses consist of variable expenses (40%) and fixed expenses (60%). Pronghorn pays a 40% tax rate and the net income is $14,160. To reduce the companys operating risks, McKay would like to review the companys operations from another perspective. She would like to know how much the company needs to generate in order to break-even. Based on the current cost structure, how sensitive is the profit to a sale volume increase of 5%.

Prepare an income statement in the gross margin format.

Prepare an income statement in the contribution margin format.

What is the break-even in sales? (Round contribution margin percentage to 4 decimal places, e.g. 0.4687 and final answer to 0 decimal places, e.g. 5,125.)

Sales break-even

$

At the current sales level, what is the margin of safety and the degree of operating leverage? (Round degree of operating leverage to 2 decimal places, e.g. 1.25.)

Margin of Safety		$
Degree of Operating Leverage

Prepare an income statement in the gross margin format. Pronghorn, Inc. Gross Margin Income Statement $ > $