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Chapter 4 Handout Problems

# Chapter 4 Handout Problems - The degree of operating...

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Unformatted text preview: The degree of operating leverage (DOL) is a measure of the sensitivity of profit changes to changes in sales volume. DOL measures the percentage of change in profit that results from a percentage of change in sales. Degree of operating leverage = Contribution marginIOperating income The higher the degree of operating leverage, the greater the change in profit when sales change. Percentage change in profit = DOL x Percentage change in sales C. Sensitivity Analysis and CVP Sensitivity analysis is a “what if“ technique that examines the impact of changes on an answer. For example, computer spreadsheets are used to analyze changes in prices, variable costs, and fixed costs on expected profits. Practice 1. The Redfish Company sells a product for \$16. Unit costs are as follows: Direct Material \$3.9 Direct Labor 1.40 Variable overhead 2.10 Variable selling expense 1.60 Total fixed overhead is \$52,000 per year. and total fixed selling and administrative expenses are \$372950. Required: a. Calculate variable ratio and contribution margin ratio w I; ,\ A l\‘ 2. Sweet Things, Inc. had the following results for the yearjust ended: Sales (60,000 units) \$120,000 Direct labor 6,000 Direct materials 18,000 Fixed manufacturing overhead 50,000 Variable selling expenses 6,000 Fixed administrative expenses 10 000 Net income 3 00 What is the company's breakeven sales voiume? 3, The amount that is available to be cover fixed costs after deducting variable expenses from sales is called the: a. target profit b. breakeven point on; margin of safety @\.I>contribution margin 4. The breakeven point is the point at which the total contribution margin is equal to: a. sales revenues b. variable costs 'T.\ fixed costs d, total costs 5. This is the brief income statement of a company: Sales ( 5,000 units @ \$12) \$60000 -Variable costs (45,000) -Fixed costs: g 6 900) Operating income \$ 8100 Tax expense: m Net Income \$ 4.860 Based on the given information, caiculate: {1) Break—even in units " [M E," ' “r gt, 3 Qgﬁe r , i" .i L it ' ,_ 71 a 5;, l (2) Break-even revenue 1 . 4'5; mm 77—77 7 15% {,0wa (3) If the desired operating income (profit) is \$9,900, how much revenue this company must make? . A i t ( -- U‘O‘mx‘ \IJ-a/ ‘31)» \‘ ~¢ .r 7\ “rm [,lwi‘ 7V lD‘Q-n 2A ‘ , H /- ‘009 v ) ~r ‘IL0 (4) How much is margin of safety? a w A, J} (,1 ,U '1‘ 4,: igv‘ CO (5) How much is this firm’s degree of operating leverage? , r r". ‘ . _. tx—n 7 \ t‘S i) I V q may”) (6) If sales increase by 10% by what percentage operating income will increase? :)<' 1 x. x ,—K 3). 4}. 5). 6. Xeller Company makes electronic keyboards. The practice model price is \$220 and variable expenses are \$190. The deluxe model price is \$340 and variable expenses are \$250. The professional model price is \$1,200 and variable expense per unit is \$800. Total fixed expenses are \$187,000. Generally, Xeller sells 6 practice models and 3 deluxe models for every professional model sold. Using the sales mix stated in the facts to form a package. what is the total package contribution margin? r i‘ What is the number of deluxe models said at breakeven What is the number of professional models sold at breakeven? What is the overall sales revenue at breakeven? Elly-WU ,5 )‘J‘i'rc- .. “in”, '.LJ @— 7. A graph that depicts the relationships among total variable costs. total ﬁxed costs. number oi‘units and operating income is the -aT/_Cost graph it”. I Volume graph Cost-volume-prol‘tt graph 81 Proﬁt-volume graph ..e. Break-even graph 8. is a measure of the sensitivity of profit changes to changes in sales volume. It measures the percentage change in proﬁts resulting from a percentage change in sales. a. Contribution margin ratio b. Variable cost ratio on Operating leverage d,-‘. Degree of operating leverage e. Proﬁt ratio 9. in order for the break-even computation to be meaningful to management. sales mix should be computed using the If i expected mix most desirable mix least desirable mix traditional mix average mix over the past 5 years r” 0- .ﬁ aria: l0. Which oi‘the following is not an assumption used to prepare a eost—volume-proﬁt graph? a linear costs within the relevant range units produced equals units sold e. constant sales mix constant cost ﬂuctuation all ofthese are assumptions used in preparing cost-volumeAproﬁt graphs 10 ...
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Chapter 4 Handout Problems - The degree of operating...

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