## Question

Tyrene Products manufactures recreational equipment. One of the company’s products, a skateboard, sells for $35. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $21.00 per skateboard of which 60% is direct labor cost.

Over the past year the company sold 41,000 skateboards, with the following operating results: Sales (41,000 skateboards) $1,435,000 Variable Expense 861,000 Contribution Margin 574,000 Fixed Expenses 420,000 Net operating Income $154,000 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards. Required: 1a. Compute the CM ratio and the break-even point in skateboards. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Contribution margin % Unit sales to break even skateboards 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 $2.80 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $35.00, what will be the new CM ratio and the new break-even point in skateboards? (Round your intermediate calculations and the “Contribution margin” answer to 2 decimal places and other answer to the nearest whole number. ) Contribution margin % Unit sales to break even 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, $154,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) 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 Tyrene 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? (Do not round intermediate calculations. 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 30%, but it would cause fixed costs to increase by 76%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in skateboards? (Round your intermediate calculations and the “Contribution margin” answer to 2 decimal places and other answer to the nearest whole number .) Contribution margin % Unit sales to break even skateboards a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $154,000, as last year? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Number of skateboards b-1. Assume that the new plant is constructed and that next year the company manufactures and sells 41,000 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. ) b-2. Compute the degree of operating leverage. (Round your answer to 2 decimal places.) Degree of operating leverage |

## Answer:

__Answer To Question 1a (All figures in $)__

*Please Note That Figures marked in bold is the final answer*

Contribution Margin= Contribution/Sales (Where contribution= sales less variable costs)

Hence, Contribution Margin= 574000/1435000 (given)

Hence Contribution Margin= **40%**

> Break Even Point (Quantity) = Fixed Costs/Contribution per skateboard

Calculation of Contribution Per Skateboard:

Sale price per skateboard = 35.00

Less: Variable Costs = 21.00

Contribution per unit = 14.00

Hence, Break even point = 420000/14 = **30000 skateboards**

> Degree Of Operating Leverage = Contribution/Net Operating Income

= 574000/154000

= **3.73**

__Answer To Question 2__

> Calculation of Revised Contribution Margin

As discussed above, Contribution Margin= Contibution/sales

We know that total sales is unchanged at 1435000. We need to calculate revised variable costs

Calculation of Revised Variable Cost

Original Variable Costs = 21.00

Add: Increase in Variable Costs= 2.80

Variable Cost per Unit = 23.80

Total Variable Cost = Variable Cost per unit * Number of skateboards

= 23.80*41000

= 975800

Contribution = Sales Less Variable Costs

= 1435000-975800

= 459200

Hence Contribution Margin = 459200/1435000 = **32%**

>Calculation of Revised Break Even Point

Break Even Point (No. Of Skateboards) = Fixed Cost / Contribution Margin per Skateboard

Contribution per unit = Sales less Variable Costs

= 35-23.80= 11.20

Or Break Even = 420000/11.20

= **37500 Skateboards**

__Answer To Question 3__

In previous answer we notice that the break even is 37500 skateboards. So when we sell 37500 skateboards we are just recovering our entire cost and we are neither gaining nor losing.

Now we need to earn 154000. We know that we are earning 11.20 per skateboard.(From Above)

So number of skateboards to be sold = 154000/11.20= 13750 skateboards

Hence number of skateboards to be sold to earn 154000 = 37500+13750 = **51250 skateboards**

__Answer To Question 4__

Contribution Margin last year **=** 40% (Refer Answer 1)

We know that Revised variable cost= 23.80 per skateboard(Refer Answer 2)

We need to calculate the Revised Selling Price so that the contribution margin stays at 40%(i.e. same as last year)

If Contribution Margin = 40%, then variable cost % = 60% (100%-CM%)

Hence Revised Selling price= Variable Cost/ Variable Cost %

Or Revised Selling price = 23.80/60% = **39.67 per skateboard**

__Answer to Question 5__

On Construction of Plant variable costs reduce by 30%

Revised Variable Costs = 21*70% = 14.70

Revised Fixed Cost = 420000*176% = 739200

Revised Contribution per skateboard = Sale Price Less Variable Cost

= 35 – 14.70 = 20.30

Revised Contribution Margin = Contribution/Sale Price

= 20.30/35 =**58%**

Revised Break Even point = Revised Fixed Cost/ Contribution per skateboard

= 739200/20.30 = 36413.80

Hence the revised break even point in skateboards is **36414**

__Answer To Question 5a__

In previous answer we notice that the break even is 36414 skateboards. So when we sell 36414 skateboards we are just recovering our entire cost and we are neither gaining or losing.

Now we need to earn 154000. We know that we are earning 20.30 per skateboard.(From Above)

So number of skateboards to be sold = 154000/20.30= 7856.20

= 7586 skateboards

Hence number of skateboards to be sold to earn 154000 = 36414+7586 = **44000 skateboards**

__Answer To Question 5b-1__

CONTRIBUTION FORMAT INCOME STATEMENT | |

Particulars | Amount |

Sales (41000* 35) | 1435000 |

Less: Variable Costs (14.70*41000 | 602700 |

Contribution | 832300 |

Less: Fixed Costs(As Above in Answer 5) | 739200 |

Net Operating Income | 93100 |

__Answer To Question 5b-2__

Degree Of Operating Leverage = Contribution/Net Operating Income

= 832300/93100

= **8.94**