Vast Spirit

Calendars imprints calendars with college names. The company has fixed expenses of

$1,125,000

each month plus variable expenses of

$4.50

per carton of calendars. Of the variable expense,

75%

is cost of goods sold, while the remaining

25%

relates to variable operating expenses. The company sells each carton of calendars for

$19.50.

Read the requirements

LOADING...

.

Requirement 1. Compute the number of cartons of calendars that

Vast Spirit

Calendars must sell each month to breakeven.

Begin by determining the basic income statement equation.

Sales revenue

-

Variable expenses

-

Fixed expenses

=

Operating income

Using the basic income statement equation you determined above solve for the number of cartons to break even.

The breakeven sales is

75,000

cartons.

Requirement 2. Compute the dollar amount of monthly sales

Vast Spirit

Calendars needs in order to earn

$338,000

in operating income.

Begin by determining the formula.

(

Fixed expenses

+

Target operating income

) /

Contribution margin ratio

=

Target sales in dollars

(Round the contribution margin ratio to two decimal places.)

The monthly sales needed to earn $338,000 in operating income is $

1,900,000

.

Requirement 3. Prepare the company's contribution margin income statement for June for sales of

485,000

cartons of calendars.

Vast Spirit
Contribution Margin Income Statement
Month Ended June 30
	Sales revenue				$9,457,500
	Variable expenses:
	Cost of goods sold			$1,636,875
	Operating expenses			545,625	2,182,500
	Contribution margin				7,275,000
	Fixed expenses				1,125,000
	Operating income				$6,150,000

Requirement 4. What is June's margin of safety (in dollars)? What is the operating leverage factor at this level of sales?

Begin by determining the formula.

Sales revenue

-

Sales revenue at breakeven

=

Margin of safety (in dollars)

The margin of safety is $

7,995,000

.

What is the operating leverage factor at this level of sales? Begin by determining the formula.

Contribution margin

/

Operating income

=

Operating leverage factor

(Round the operating leverage factor to three decimal places.)

The operating leverage factor is

1.183

.

Requirement 5. By what percentage will operating income change if July's sales volume is

13%

higher? Prove your answer. (Round the percentage to two decimal places.)

If volume increases 13%, then operating income will increase

15.38

%.

Prove your answer. (Round the percentage to two decimal places.)

Original volume (cartons)
Add: Increase in volume
New volume (cartons)
Multiplied by: Unit contribution margin
New total contribution margin
Less: Fixed expenses
New operating income
vs. Operating income before change in volume
Increase in operating income
Percentage chang