Question

chapter 5 homework12part 2 of 20.5 pointsrequired information1 chapter 5: applying excel2 data3 unit sales: 70,000 units4 selling price per unit: $30 per unit5 variable expenses per unit: $18 per unit6 fixed expenses: $756,000if your formulas are correct, you should get the correct answers to the following questions.a. what is the break-even in dollar sales?break-even in dollar salesb. what is the margin of safety percentage?margin of safety percentage %c. what is the degree of operating leverage?note: round your answer to 2 decimal places.degree of operating leverage3. using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 20%.percentage increase in net operating income %

Explanation:

Step1: Calculate contribution margin ratio

First, find unit contribution margin: $\text{Unit contribution margin} = \$30 - \$18 = \$12$
Then, contribution margin ratio: $\text{CM ratio} = \frac{\$12}{\$30} = 0.4$

Step2: Find break-even dollar sales

$\text{Break-even sales (dollars)} = \frac{\text{Fixed expenses}}{\text{CM ratio}} = \frac{\$756,000}{0.4}$

Step3: Calculate margin of safety (dollars)

First, current sales: $\text{Current sales} = 70,000 \times \$30 = \$2,100,000$
$\text{Margin of safety (dollars)} = \$2,100,000 - \$1,890,000 = \$210,000$

Step4: Compute margin of safety percentage

$\text{Margin of safety \%} = \frac{\$210,000}{\$2,100,000} \times 100\%$

Step5: Calculate net operating income

$\text{Net operating income} = (70,000 \times \$12) - \$756,000 = \$840,000 - \$756,000 = \$84,000$

Step6: Find degree of operating leverage

$\text{Degree of operating leverage} = \frac{\text{Total contribution margin}}{\text{Net operating income}} = \frac{\$840,000}{\$84,000}$

Step7: Compute % change in net operating income

$\text{\% Change in income} = \text{Degree of operating leverage} \times \text{\% Change in sales} = 10 \times 20\%$

Answer:

a. Break-even in dollar sales: $\$1,890,000$
b. Margin of safety percentage: $10\%$
c. Degree of operating leverage: $10.00$

1. Percentage increase in net operating income: $200\%$