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Darringer Products.doc

Darringer Products manufactures recreational equipment. One of the companys products, a skateboard,
sells for $42.00. The skateboards are manufactured in an antiquated plant that relies heavily on direct
labor workers. Thus, variable costs are high, totaling $25.20 per skateboard of which 60% is direct labor
cost.
Over the past year the company sold 44,000 skateboards, with the following operating results:

Sales (44,000
skateboards)
Variable expenses

$

1,108,800

Contribution margin
Fixed expenses
Net operating income

1,848,000

739,200
470,400
$

268,800

Management is anxious to maintain and perhaps even improve its present level of income from the
skateboards.
Required:
1-a. Compute the CM ratio and the break-even point in skateboards.
Contribution margin
Unit sales to break-even
point

%
skateboards

1-b. Compute the degree of operating leverage at last year's level of sales. (Round your answer to 2
decimal places.)
Degree of operating leverage
2. Due to an increase in labor rates, the company estimates that variable costs will increase by $3.36
per skateboard next year. If this change takes place and the selling price per skateboard remains
constant at $42.00, what will be the new CM ratio and the new break-even point in skateboards?
Contribution margin
Unit sales to break-even
point

%
skateboards

3. Refer to the data in (2) above. If the expected change in variable costs takes place, how many
skateboards will have to be sold next year to earn the same net operating income, $268,800, as last
year?
Number of skateboards
4. Refer again to the data in (2) above. The president has decided that the company may have to raise
the selling price of its skateboards. If Darringer Products wants to maintain the same CM ratio as last
year,what selling price per skateboard must it charge next year to cover the increased labor
costs? (Round your answer to 2 decimal places.)
Selling price

$

5. Refer to the original data. The company is considering the construction of a new, automated plant.
The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 99%.
If the new plant is built, what would be the companys new CM ratio and new break-even point in
skateboards?
Contribution margin
Unit sales to break-even
point

%
skateboards

6. Refer to the data in (5) above.
a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net
operating income, $268,800, as last year?
Number of skateboards
b-1. Assume that the new plant is constructed and that next year the company manufactures and
sells 44,000 skateboards (the same number as sold last year). Prepare a contribution format
income statement. (Input all amounts as positive values except losses which should be
indicated by minus sign.)
Contribution Income Statement.
$

$

b-2. Compute the degree of operating leverage. (Round your answer to 2 decimal places.)
Degree of operating
leverage

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Darringer Products.doc

Darringer Products manufactures recreational equipment. One of the companys products, a skateboard,
sells for $42.00. The skateboards are manufactured in an antiquated plant that relies heavily on...

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