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Solutio N: CM Ratio 25% Expense Ratio 75%

The document contains solutions to 7 questions regarding cost-volume-profit analysis. Question 1 gives cost and expense ratios of 25% and 75%. Question 2 calculates breakeven sales and units. Question 3 calculates increased net income from a sales increase. Question 4 calculates units needed to earn a target profit. Question 5 defines margin of safety in dollars and percentage terms. Question 6 defines operating leverage and calculates income increase percentage. Question 7 analyzes changes to costs and sales.

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79 views5 pages

Solutio N: CM Ratio 25% Expense Ratio 75%

The document contains solutions to 7 questions regarding cost-volume-profit analysis. Question 1 gives cost and expense ratios of 25% and 75%. Question 2 calculates breakeven sales and units. Question 3 calculates increased net income from a sales increase. Question 4 calculates units needed to earn a target profit. Question 5 defines margin of safety in dollars and percentage terms. Question 6 defines operating leverage and calculates income increase percentage. Question 7 analyzes changes to costs and sales.

Uploaded by

Sumreeen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Q. 1

Solutio
n
CM Ratio 25%  
  Expense Ratio 75%  
           

           
Q. 2

Solutio
n

Breakeven in $: Sales = Variable expense + fixed cost + profit


  Breakeven in $: X = 0.75X + 240000 + 0
  Breakeven in $ = 0.25X = 240000
  Breakeven in $ = X = 240000/0.25
  Breakeven in $: X = 960000
 
  Breakeven in Units: X = 960000/60
  Breakeven in Units: X = 16000
           

           
Q. 3

Solutio
n
Net Income if sales increase by 400000:
 
  Net Income(Increase) = CM Ratio x increase in Sales
  Net Income(Increase) = 25% x 400000
  Net Income(Increase) = 100000
           

           
Q. 4

Solutio
n
If Company wants profit of atleast 90000
 
  Incresae Sales = Increase in income / CM Ratio
  Incresae Sales = 30000 / 25%
  Incresae Sales = 120000
 
  Units = 120000/60
  Units = 2000
 
  Total units to be sold to earn profit of atleast 90000 = 22,000
           

               
Q.5 Margin of Safety in Dollars
Solution

 
  MOS in $ = (Current Sales - Breakeven Sales)
  MOS in $ = (1,200,000 - 960,000)
  MOS in $ = 240,000
 
  Margin of Safety in Percentage
 
  MOS = (Current Sales - breakeven point)/ Current Sales x 100
  MOS = (1,200,000 - 16000)/1,200,000 x 100
  MOS = 20%
   

                 
Q. 6

Solution

a) Degree of Operating Leverage


 
  Operating Leverage = Contribution Margin / Profit
  Operating Leverage = 300000 / 60000
  Operating Leverage = 5 or 500%
 
b) Net Income Increase in percentage
 
  Net income Increase in % = opearting leverage x percentage increase in sales
  Net income Increase in % = 5 x 8%
  Ne Income Increase in % = 40%
 
   
129600
c) Sales 0  
  Variable Expense 972000  
Contribution
  Margin 324000  
  Fixed Cost 240000  
  Net Income 84000  
                 

               
Q. 7

Solutio
n Per Percentag
  Total unit e    
144000
  Sales 0 60 100%    
115200
  Variable Expense 0 48 80%    
Contribution
  Margin 288000 12 20%    
  Fixed Cost 270000        
  Net Income 18000        
   
b) New Breakeven Points  
135000
  Breakeven in $ 0  
  Breakeven in Unit 22500  
   
c) I would not recommend the changes to be made as it reduce the company's profit
  and company need to sell more units to reach breakeven

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