Q1 The contribution margin (CM) ratio is the raio of contribution margin to total sales
     revenue.  The CM ratio shows the change in contribution margin that will result from
     increases and decreases in sales revenue.  A dollar increase in contribution margin will
     result in a dollar increase in operating income.  Therefore, for planning purposes, a knowledge
     of a product's CM ratio is extremely helpful in projecting potential contribution margin
     and potential operating income.

Q3  Company B will tend to realize the most rapid increase in profits. The reason is that
      Company B will have a higher contribution margin ratio than Company A due to its
      lower variable costs. Thus, contribution margin (and operating income) will increase
      more rapidly as sales increase.

Q4 Operating leverage measures the impact on operating income of a given percentage
     change in sales.  The degree of operating leverage at a given level of sales is computed
     by dividing the contribution margin at that level of sales by the operating income.

Q6 The breakeven point can be defined as (1) the level of sales at which an organization
     neither earns a profit nor incurs a loss; (2) the point where total revenues equal total
     costs; and (3) the point where total contribution margin equals the fixed costs.

Q13  A higher break-even point and a lower net income could result if the sales mix shifted
from high contribution margin products to low contribution margin products.  Such a shift would
cause the average contribution margin ratio in the company to decline, resulting in less total
contribution margin for a given amount of sales.  Thus, net income would decline (all else equal).
With a lower contribution margin ratio, the break-even point would be higher since it would
require more sales to cover the same amount of fixed costs.

E8 (1)   BEP in Units = ( 50 - 32)X - 108,000 = 0
                X = 6000 stoves
            ( 6000 lanterns x $50 each = $300,000 in breakeven sales dollars)

          We can also calculate breakeven sales dollars as follows:
           BEP in sales dollars = FC / contribution margin ratio
                                $108,000 / 36% = $300,000

      (2) If P remains the same and VC increase as a percentage of sales, then VC are higher.
            If VC are higher, CM is lower, and more stoves would have to be sold to generate
            enough contribution margin to cover FC. The breakeven point would be HIGHER.

      (3)

P9  (1)  BEP in Units = ( 30 - 18)X - 150,000 = 0

        (2) I'll do this in class

        (3)  $6,000 loss

        (4) New BEP = 13,333 pairs of shoes

        (5)  $28,750 operating income

        (6)  New BEP = 11,000 pairs of shoes

              WHAT IS THE POINT OF INDIFFERENCE BETWEEN THE ORIGINAL INFORMATION
              (USING A SALES COMMISSION) & USING A FIXED SALARY AS SUGGESTED IN
              PART #6?
 

P10 (1) CM Ratio = CM / P = (P-V) / P = (30-21)/30 = 9/30=30%
            BEP:  (30-21)X - 180,000 = 0
                           X=20,000 units
            BE Sales Dollars = FC / CM Ratio = 180,000 / 30% = $600,000 total sales to break even

      (2)  Increase in monthly operating income = $8000
             Since the company now has a loss of $4,500, the changes ( a plus $8,000) would result in a
              positive operating income of $3,500.

        (3)  Sales (39,000 units x $27)         $1,053,000
              - Var Costs (39,000 x $21)          -  819,000
              Contribution Margin                        234,000
              -  Fixed Costs                            -  240,000
               Operating Loss                       $   <6,000)

      (4) (30-21.75)X - 180,000 = $9,750
               X = 23,000 units

        (5)  In class  (parts A,B, C)

              WHAT IS THE POINT OF INDIFFERENCE BETWEEN THE ORIGINAL INFORMATION
               (part #1) AND USING AUTOMATION AS SUGGESTED IN PART #5?
 

   P12  (1) CM Ratio = 12/20 = 60%

          (2)  BEP Sales Dollars = 180,000/60% = $300,000

          (3)  Additional $75,000 in sales provide additional CM dollars
                        $75,000 x 60% = additional CM of $45,000.

                Fixed costs won't change, so the additional $45,000 in CM falls right to the bottom line
                and increases our Op. Inc. by $45,000

(1)  BEP = 2,500 pairs
      BE Sales Dollars = F / CM Ratio = $60,000 / 60% = $10,000

(2)  In Class

(3)  X=3,250 pairs

(4)  Incremental Approach

     Additional Contribution Margin  = $25,000 more sales x 60% (CM Ratio)  =   $15,000
     - Additional FC in salary                                                                                 8,000
     Additional operating income                                                                         $7,000

      The position should be converted to full time.

(5)  a)  Op Leverage = CM / Operating Income = 72,000 / 12,000 = 6

      b)  If sales increase by 50%, operating income will increase by (6 x .50) or 300%.
           Total operating income will be $12,000 + (12,000 x 300%) = $48,000
 
 

P18 (1)

April