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Chapter 20: 15SE (page 1087)

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

S20-15 Computing degree of operating leverage

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the degree of operating leverage (round to two decimal places). Estimate the operating income if sales increase by 15%.

Short Answer

Expert verified

The degree of operating leverage is 4.05.

Step by step solution

01

Calculation of Contribution margin

Contributionmargin=Salesprice–Variablecost=$70-$42=$28

02

Calculation of degree of Operating leverage

Degreeofoperatingleverage=ContributionmarginOperatingincome=$28×8,100$28×8,100-$170,800=$226,800$56,000=4.05

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Most popular questions from this chapter

Owner Shan Mu is considering franchising her Noodles by Murestaurant concept. She believes people will pay \(10.00 for a large bowl ofnoodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costsfor a franchise at \(9,000.

Requirements

1. Use the contribution margin ratio approach to find a franchise’s breakevensales in dollars.

2. Mu believes most locations could generate \)61,500 in monthly sales. Isfranchising a good idea for Mu if franchisees want a minimum monthlyoperating income of $21,000? Explain your answer.

What is sensitivity analysis? How do managers use this tool?

Complete the table below for the missing amounts:

A B C

Number of units 2,064 units (d) 2,570 units

Sales price per unit \( 250 \) 125 $ (g)

Variable costs per unit (a) 50 4,528

Contribution margin per unit 125 (e) (h)

Total contribution margin (b) 1,567,500 (i)

Contribution margin ratio (c) (f) 20%

You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class.

You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales.

The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel’s $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship.

Requirements

1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal?

2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller?

3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently?

4. After considering all the factors, should you inform Barnhill or simply keep quiet?

What are the three ways contribution margin can be ex
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