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Chapter 20: Q33E (page 1128)

The Circle Clock Company sells a particular clock for \(25. The variable costs are \)13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating income? Explain your answer.

Short Answer

Expert verified

The operating income increase to $1,200 with an additional sale of $100 clock, due to increased sales revenue and contribution margin.

Step by step solution

01

Statement showing operating income

Sales Volume

Contribution margin per unit

($25-$13)

Total contribution margin (Contribution margin x Quantity)

Fixed cost

Operating income

250

$12

$3,000

$3,000

$0

300

$12

$3,600

$3,000

$600

400

$12

$4,800

$3,000

$1,200

02

Sensitivity analysis

The increase in sales of 100 units increased operating income by $1,200 (100 units x $12 contribution margin per unit).

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Most popular questions from this chapter

The contribution margin income statement of Sugar Lips Donuts for August 2018 follows:

Sugar Lips sells three dozen plain donuts for every dozen custard-filled donuts. A dozen plain donuts sells for \(4.00, with total variable cost of \)1.80 per dozen. A dozen custard-filled donuts sells for \(8.00, with total variable cost of \)3.60 per dozen.

Requirements

1. Calculate the weighted-average contribution margin.

2. Determine Sugar Lips’s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.

3. Compute Sugar Lips’s margin of safety in dollars for August 2018.

4. Compute the degree of operating leverage for Sugar Lips Donuts. Estimate the new operating income if total sales increase by 30%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar. Assume the sales mix remains unchanged.)

5. Prove your answer to Requirement 4 by preparing a contribution margin income statement with a 30% increase in total sales. (The sales mix remains unchanged.)

Crandall Company sells flags with team logos. Crandall has fixed costs of \(583,200 per year plus variable costs of \)4.80 per flag. Each flag sells for \(12.00.

Requirements

1. Use the equation approach to compute the number of flags Crandall must sell each year to break even.

2. Use the contribution margin ratio approach to compute the dollar sales Crandall needs to earn \)33,000 in operating income for 2018. (Round the contribution margin ratio to two decimal places.)

3. Prepare Crandall’s contribution margin income statement for the year ended December 31, 2018, for sales of 70,000 flags. (Round your final answers up to the next whole number.)

4. The company is considering an expansion that will increase fixed costs by 21% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should Crandall undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)

Question: Determining total variable cost

For each variable cost per unit listed below, determine the total variable cost when units produced and sold are 25, 50, and 100 units.

Direct materials $ 40

Direct labor 80

Variable overhead 9

Sales commission 12

Preparing a contribution margin income statement

Gabelman Company sells a product for \(95 per unit. Variable costs are \)40 per unit, and fixed costs are $2,200 per month. The company expects to sell 570 units in September. Prepare an income statement for September using the contribution margin format

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
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