Contribution margin ratio is calculated by taking Contribution Sales x 100

# Contribution margin ratio is calculated by taking

This preview shows page 1 - 3 out of 4 pages.

Contribution margin ratio is calculated by taking (Contribution / Sales) x 100 Contribution=66-36 CM = (30/66) x 100 = 45.45% Contribution= 66-39 CM = (27/66) x 100 = 40.90% Under the new plan, profitability at very high-volume levels would be low in comparison to very high-volume levels under the old plan. 8.) Air Purifier Inc. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are \$2,450,000, but 15 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is \$40. How many units does the firm need to sell to reach the cash break-even point? Cash related fixed costs = Total Fixed Costs – Depreciation = \$2,400,000 – 15% (2,400,000) = \$2,400,000 – \$360,000 = \$2,040,000 BE = \$2,040,000 / \$30 = 68,000 Units 10.) The Sterling Tire Company’s income statement for 20X1 is as follows: Given this income state, compute the following: Q = 20,000 P = \$60 VC = \$30 FC = \$400,000 I = \$50,000 a. Degree of operating leverage DOL= (Q (P - VC)) / (Q (P - VC) FC) DOL = (20,000 (\$60 - \$30)) / (20,000 (\$60 - \$30) - \$400,000) = 3 b. Degree of financial leverage DFL = (EBIT / EBIT - I) DFL = (\$200,000) / (\$200,000 - \$50,000) = 1.333. c. Degree of combined leverage DCL= (Q (P - VC)) / (Quantity (P - VC) – FC - I) DCL = (20,000 (\$60 - \$30)) / (20,000 (\$60 - \$30) -\$400,000 - \$50,000) = 4 d. Break-even point in units BE = (FC) / (P - VC) Sales (20,000 tires at \$6 each) \$1,200,000 Less: Variable costs (20,000 tires at \$30) \$ 600,000  #### You've reached the end of your free preview.

Want to read all 4 pages?

• • • 