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Chapter 6 - Lecture Problems

# Chapter 6 - Lecture Problems - Chapter#6 Lecture Problems...

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Chapter #6 – Lecture Problems: Problem #1 Hardee Company sells a single product. The selling price is \$30 per unit and the variable expenses are \$18 per unit. The company’s most recent annual contribution format income statement is given below: Sales \$ 135,000 Less variable expenses 81,000 Contribution margin 54,000 Less fixed expenses 48,000 Net operating income \$ 6,000 a. Compute the contribution margin per unit. b. Compute the CM ratio. c. Compute the break-even point in sales dollars. d. Compute the break-even point in units sold. e. How many units must be sold next year to double the company’s profits. f. Compute the company’s degree of operating leverage. g. Sales for next year (in units) are expected to increase by 5%. Using the degree of operating leverage, compute the expected percentage increase in net operating income. h. Verify your answer to part g above by preparing a contribution format income statement showing 5% increase in sales. 1

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Solution: a. Per Unit % Selling price \$ 30 100 % Less: variable expenses 18 60 Unit contribution margin \$ 12 40 % b. CM ratio = Contribution Margin = \$ 54,000 = 40 % Sales \$135,000 c. Sales = Variable Expenses + Fixed Expenses + Profits X = 0.60X + \$48,000 + \$0 0.40X = \$48,000 X = \$48,000/0.40 X
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