PROBLEM 5–21 Basic CVP Analysis [LO1, LO3, LO4, LO6, LO8]

Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable expenses are $6 per unit, and fixed expenses total $180,000 annually.

Required:

Answer the following independent questions:

1.       What is the product’s CM ratio?

2.       Use the CM ratio to determine the break-even point in sales dollars.

3.       The company estimates that sales will increase by $45,000 during the coming year due to increased demand. By how much should net operating income increase?

4.       Assume that the operating results for last year were as follows:

 

Sales . . . . . . . . . . . . . . . . . . . . . . .	$360,000
Variable expenses . . . . . . . . . . . . .	144,000
Contribution margin . . . . . . . . . . . .	216,000
Fixed expenses . . . . . . . . . . . . . . .	180,000
Net operating income . . . . . . . . . .	$ 36,000

 

a.       Compute the degree of operating leverage at the current level of sales.

b.       The president expects sales to increase by 15% next year. By how much should net oper- ating income increase?

5.       Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $70,000 increase in advertising expenditures, would increase annual unit sales by 50%. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. Would you recommend that the company do as the sales manager suggests?

 

 

 

 

6.       Refer to the original data. Assume again that the company sold 28,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $2 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertis- ing be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.