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Case Study
The margin of safety can be calculated by:
A)
B)
C)
D)
A
Sales − (Fixed expenses/Contribution margin ratio).
Sales − (Fixed expenses/Variable expense per unit).
Sales − (Fixed expenses + Variable expenses).
Sales − Net operating income.
Hopi Corporation expects the following
operating results for next year:
Sales $400,000
Margin of safety
$100,000
Contribution margin ratio 75%
Degree of operating leverage
4
What is Hopi expecting total fixed expenses to be next year?
•
A)
$75,000
•
B)
$100,000
•
C)
$200,000
•
D)
$225,000
•
D
Ans: D
• Solution:
Current sales - Breakeven sales = Margin of safety
Substituting the given information into the above equation,
we will have:
$400,000 − Breakeven sales = $100,000
Breakeven sales = $300,000
Breakeven sales = Fixed expenses ÷ Contribution margin ratio
Substituting the given information into the above equation,
we will have:
$300,000 = Fixed expenses ÷ 0.75
Fixed expenses = $225,000
Escareno Corporation has provided its contribution format
income statement for June. The company produces and sells a
single product.
Sales (8,400 units) $764,400
Variable expenses
445,200
Contribution margin 319,200
Fixed expenses
250,900
Net operating income
$ 68,300
If the company sells 8,200 units, its total contribution margin
should be closest to:
•
A)
$301,000
•
B)
$311,600
•
C)
$319,200
•
D)
$66,674
•
B
Ans: B
Solution:
Current contribution margin ÷ Current sales in
units = Contribution margin per unit
$319,200 ÷ 8,400 = $38 contribution margin per
unit
If 8,200 units are sold, the total contribution
margin will be 8,200 × $38, or $311,600.
The Bronco Birdfeed Company
reported the following information:
Sales (400 cases)
$100,000
Variable expenses
60,000
Contribution margin
40,000
Fixed expenses
35,000
Net operating income $5,000
How much will the sale of one additional case add to Bronco's net
operating income?
•
A)
$250.00
•
B)
$100.00
•
C)
$150.00
•
D)
$12.50
•
B
Ans: B
Solution:
Current contribution margin ÷ Current sales in
cases =
Contribution margin per case
$40,000 ÷ 400 =
$100 contribution margin per case
If one additional case is sold, net operating
income will increase by $100.
The margin of safety in the Flaherty Company is
$24,000. If the company's sales are $120,000
and its variable expenses are $80,000, its fixed
expenses must be:
•
A) $8,000
•
B) $32,000
•
C) $24,000
•
D) $16,000
•
B
Ans: B
Solution:
Current sales - Breakeven sales = Margin of safety
Substituting the given information into the above equation, we will
have:
$120,000 - Breakeven sales = $24,000
Breakeven sales = $96,000
Sales - Variable expenses = Contribution margin
$120,000 - $80,000 = $40,000
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $ 40,000 ÷ $120,000
Contribution margin ratio = 0.33333
Breakeven sales = Fixed costs ÷ Contribution margin ratio
Substituting the given information into the above equation, we will
have:
$96,000 = Fixed costs ÷ 0.33333
Fixed costs = $32,000
• Dodero Company produces a single product which sells
for $100 per unit. Fixed expenses total $12,000 per
month, and variable expenses are $60 per unit. The
company's sales average 500 units per month. Which
of the following statements is correct?
A) The company's break-even point is $12,000 per month.
B) The fixed expenses remain constant at $24 per unit for
any activity level within the relevant range.
C) The company's contribution margin ratio is 40%.
D) Responses A, B, and C are all correct.
C
Ans: C
Solution:
Answer A is not correct because:
• Sales = Variable expenses + Fixed expenses + Profit
• $100Q = $60Q + $12,000 + $0
• $40Q = $12,000
• Q = $12,000 ÷ $40 per unit = 300 units
• 300 units × $100 selling price per unit = $30,000 breakeven sales in dollars
Answer B is not correct because fixed costs change as activity level changes
Answer C is correct because:
• Contribution margin per unit = Selling price per unit - Variable expenses per unit
• = $100 - $60 = $40
• Contribution margin ratio = Contribution margin per unit ÷ Selling price per unit
• Contribution margin ratio = $40 ÷ $100
• Contribution margin ratio = 40%
Holt Company's variable expenses are 70% of
sales. At a $300,000 sales level, the degree of
operating leverage is 10. If sales increase by
$60,000, the degree of operating leverage will
be:
•
A) 12
•
B) 10
•
C) 6
•
D) 4
D
Ans: D
Solution:
Sales
$300,000
Variable expenses ($300,000 × 70%)
210,000
Contribution margin
90,000
Fixed expenses
?
Net operating income
$
?
Current degree of operating leverage = Current contribution margin ÷ Current
net operating income 10 = $90,000 ÷ Current net operating income
Current net operating income = $90,000 ÷ 10 = $9,000
Contribution margin = Fixed expenses - Net operating income
$90,000 = Fixed expenses - $9,000
Fixed expenses = $90,000 - $9,000 = $81,000
Sales ($300,000 + $60,000)
$360,000
Variable expenses ($360,000 × 70%)
252,000
Contribution margin
108,000
Fixed expenses
81,000
Net operating income
$ 27,000
Degree of operating leverage = Contribution margin ÷ Net operating income
= $108,000/$27,000 = 4.0
Gayne Corporation's contribution margin ratio is
12% and its fixed monthly expenses are $84,000.
If the company's sales for a month are $738,000,
what is the best estimate of the company's net
operating income? Assume that the fixed
monthly expenses do not change.
•
A)
$565,440
•
B)
$654,000
•
C)
$88,560
•
D) $4,560
D
Ans: D
Solution:
Sales
$738,000
Variable expenses ($738,000 × 88%) 649,440
Contribution margin ($738,000 × 12%) 88,560
Fixed expenses
84,000
Net operating income
$ 4,560
Wilson Company prepared the following preliminary
budget assuming no advertising expenditures:
Selling price
$10 per unit
Unit sales
100,000
Variable expenses
$600,000
Fixed expenses
$300,000
Based on a market study, the company estimated that it could increase
the unit selling price by 15% and increase the unit sales volume by
10% if $100,000 were spent on advertising. Assuming that these
changes are incorporated in its budget, what should be the
budgeted net operating income?
•
A)
$175,000
•
B)
$190,000
•
C)
$205,000
•
D)
$365,000
C
Ans: C
Solution:
Sales (110,000 units × $11.50)
$1,265,000
Variable expenses (110,000 units × $6*) 660,00
Contribution margin
605,000
Fixed expenses ($300,000 + $100,000)
400,000
Net operating income
$ 205,000
* Current variable expenses ÷ Current sales in units
= Variable expense per unit
$600,000 ÷ 100,000 = $6 variable expense per unit
Data concerning Kardas Corporation's single
product appear below:
Per Unit
Percent of Sales
Selling price
$140
100%
Variable expenses
28
20%
Contribution margin
$112
80%
The company is currently selling 8,000 units per month. Fixed expenses
are $719,000 per month. The marketing manager believes that a
$20,000 increase in the monthly advertising budget would result in
a 180 unit increase in monthly sales. What should be the overall
effect on the company's monthly net operating income of this
change?
•
A)
decrease of $160
•
B)
increase of $20,160
•
C)
decrease of $20,000
•
D)
increase of $160
D
Ans: D
Solution:
8,000 units
8,180 units
Sales (8,000 units, 8,180 units × $140) $1,120,000 $1,145,200
Variable expenses :
($1,120,000, $1,145,200 × 20%)
224,000
229,040
Contribution margin =
896,000
916,160
Fixed expenses =
719,000
739,000
Net operating income =
$ 177,000
$ 177,160
Increase in net operating income: $177,160 - $177,000 = $160