Marg of Safety & Op. Leverage
This formula is used to calculate the margin of safety.
Total Sales - break-even sales
Target profit using dollar sales equation is...
Profit = CM ratio * sales - fixed expenses
The break-even point is the level of sales at which the company's profit is...
0
selling price per unit - variable price per unit
During the month of April, the employee time tickets included $35,000 of direct labor, and $30,000 of indirect labor. Record the correct journal entry.
Debit: Work in process 35,000
Debit: Manufacturing overhead... 30,000
Credit: Salaries and Wages Payable 65,000
Contribution margin/ net operating income equals...
Operating Leverage
LIN CORPORATION HAS A SINGLE PRODUCT WHOSE SELLING PRICE IS $150 PER UNIT AND WHOSE VARIABLE EXPENSE IS $70 PER UNIT. THE COMPANY’S MONTHLY FIXED EXPENSE IS $30,000. CALCULATE THE UNIT SALES NEEDED TO ATTAIN A TARGET PROFIT OF $10,000.
500 units
10,000 = (150-70) * Q - 30,000 or
10,000 + 30,000 / (150-70)
During 2019, the Construction Company had fixed expenses of $90,000. The contribution margin per unit is given as $500. How many unit sales must the Construction Company make in order to break even?
180
90,000/500 0r 0= 500 * Q - 90,000
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $2.00 and the average variable expense per cup is $0.50. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the contribution margin?
$3,150
Unit CM approach: 2.50-.50 = 1.50 * 2,100
Total CM appraoch: (2.50 * 2,100) -( .50 * -2,100)
What does b in the equation Y= a + bX represent?
the variable cost per unit of activity
Selling price per unit = $25
variable expense per unit = $10
fixed expense per month= $4,500
unit sales per month = 600
1. What is the company's margin of safety? 2. What is the company's margin of safety as a percentage of sales?
1. (25*600) - (4,500/25-10/25) = $7500
2. 7,500/15,000= 50%
Sales per unit = $40
Variable expense per unit =$28
Fixed expenses = $153,600
What are the unit sales needed to attain target profit of $66,000 ?
18,300
Unit CM = 40-28 = 12
(66,000 + 153,600) / 12 or
66,000 = 12 * Q - 153,600
Mauro Products distributes a single product, a woven basket whose selling price is $15 per unit and whose variable expense is $11 per unit. The company’s monthly fixed expense is $11,600. What is the company's break-even point in unit sales?
2,900 units
11,600/(15-11) or 0=4*Q - 11,600
Last month when Holiday Creations, Inc., sold 25,000 units, total sales were $180,000, total variable expenses were $134,000 and fixed units were 39,600. What is the company's contribution margin ratio?
.26
180,000 - 134,000/ 180,000
On April 4, Wilson Corporation had $50,000 in raw materials taken and used for production. The raw materials included $41,000 of direct materials, and $9,000 of indirect materials. Record the correct journal entry.
Debit: Work in process... 41,000
Debit: Manufacturing overhead 9,000
Credit: Raw materials... 50,000
Sales = 140,000
variable expenses = 65,000
fixed expenses = 10,000
What is the company's degree of operating leverage? (To the nearest hundredth)
CM= 140,000 - 65,000 = 75,000
NOI = 140,000 - 65,000 - 10,000 = 65,000
80,000/70,000 = 1.23
Lin Corporation has a single product whose selling price is $134 per unit and whose variable expense is $67 per unit. The company’s monthly fixed expense is $31,750. Calculate the dollar sales needed to attain a target profit of $9,700.
$82,900
CM ratio = 134-67/134 = 0.5
target profit + fixed expenses/CM ratio
9,700 + 31,750/0.5
Find breakeven sales ( to the nearest dollar)
Sales per unit= 40
Variable expense per unit= 10
Fixed expense per month=40,000
Unit sales per month= 2,000
$533,333
CM Ratio = 40-10/40 = .75 or (40*2,000) - 10*2,000)/ 40*2,000)
0 = .75 * Sales - 40,000 or
40,000/0.75
Sales = 80,000
Variable expenses = 32,000
Contribution margin= ?
Fixed expenses = ?
Net operating income = 10,500
What are the values of the ? 's
CM = 48,000
Fixed expenses = 37,500
Engineering Co. estimates that it will require 270,000 direct labor hours to meet the upcoming period’s production needs. In addition, the company estimates total manufacturing overhead at $220,000; and variable manufacturing overhead costs of $3.50 per direct labor hours. Calculate the predetermined overhead rate.
$4.31
(270,000 * 3.5) + 220,000 / 270,000
Sales = $430,000
variable expenses = $210,000
fixed expenses = $74,000
1. What is the company's degree of operating leverage? (Nearest hundredth) 2. Using the degree of operating leverage, estimate the impact on net operating income of a 12% increase in sales.
1. 1.51 2. 18.12%
1. CM = 430,000 - 210,000 = 220,000
NOI = 220,000 - 74,000 = 146,000
220,000/146,000 = 1.51
2. 1.51 * .12 = .1812 * 100= 18.12 %
Grant Company sells a single product. The product has a selling price of $50 per unit and variable expenses of 80% of sales. If the company's fixed expenses total $150,000 per year, what would be the dollar sales to reach a target profit of $400,000?
$2,750,000
Variable expense = .8 * 50 = 40
CM ratio = 50-40/50 = 0.2
400,000 = .2 * Sales - 150,000 or
400,000 + 150,000/ .2
LIN CORPORATION HAS A SINGLE PRODUCT WHOSE SELLING PRICE IS $150 PER UNIT AND WHOSE VARIABLE EXPENSE IS $70 PER UNIT. THE COMPANY’S MONTHLY FIXED EXPENSE IS $30,000. CALCULATE THE BREAKEVEN SALES. Rounded to the nearest dollar.
$56,250
30,000/(150-70/150)
30,000/.53
LAST MONTH WHEN HOLIDAY CREATIONS, INC., SOLD 10,000 UNITS, TOTAL SALES WERE $400,000, TOTAL VARIABLE EXPENSES WERE $220,000, AND FIXED EXPENSES WERE $85,000. 1. WHAT IS THE COMPANY’S CONTRIBUTION MARGIN (CM) RATIO? 2. WHAT IS THE ESTIMATED CHANGE IN THE COMPANY’S NET OPERATING INCOME IF IT CAN INCREASE TOTAL SALES BY $1,000
1. 400,000 - 220,000/ 400,000 = 0.45
2. 0.45 * 1,000 = $450
The actual overhead for the year was $800,000 with a total of 150,000 direct labor hours worked on jobs. Their predetermined overhead rate is 5.00 per direct labor hour. What is the applied overhead, and was it overapplied or underapplied?
5.00 * 150,000 = 750,000 = applied overhead
Underapplied