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MA Assignment 3

This document contains the answers to 7 questions regarding the breakeven analysis, operating leverage, and proposed changes to a company's cost structure. Question 1 provides the company's contribution margin ratio and expense ratio. Question 2 calculates the dollar and unit breakeven points. Question 3 finds the net income increase from a $400,000 sales increase. Question 4 determines the sales increase needed to earn a $90,000 profit. Question 5 calculates the dollar and percentage margin of safety. Question 6 analyzes the company's degree of operating leverage and calculates the percentage change in net income from an 8% sales increase. Question 7 examines the impact of proposed cost structure changes on breakeven points and profitability.

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141 views3 pages

MA Assignment 3

This document contains the answers to 7 questions regarding the breakeven analysis, operating leverage, and proposed changes to a company's cost structure. Question 1 provides the company's contribution margin ratio and expense ratio. Question 2 calculates the dollar and unit breakeven points. Question 3 finds the net income increase from a $400,000 sales increase. Question 4 determines the sales increase needed to earn a $90,000 profit. Question 5 calculates the dollar and percentage margin of safety. Question 6 analyzes the company's degree of operating leverage and calculates the percentage change in net income from an 8% sales increase. Question 7 examines the impact of proposed cost structure changes on breakeven points and profitability.

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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Download as XLSX, PDF, TXT or read online on Scribd
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MUHAMMAD JASIM MALIK

Reg# 38058

Q. 1 CM Ratio 25%
Expense Ratio 75%

Q. 2 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 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 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


JASIM MALIK

Q.5 Margin of Safety in Dollars

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 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%

c) Sales 1296000
Variable Expense 972000
Contribution Margin 324000
Fixed Cost 240000
Net Income 84000

Q. 7 Total Per unit Percentage


Sales 1440000 60 100%
Variable Expense 1152000 48 80%
Contribution Margin 288000 12 20%
Fixed Cost 270000
Net Income 18000

b) New Breakeven Points


Breakeven in $ 1350000
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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