1. Tyrene products manufactures recreational equipment. One of the company’s products, a skateboards, sells for $32. the skateboards manufactured in as antiquated plant that relies heavily on direct labor workers. Thus variable costs are high, totaling $22.40 per skateboard of which 70% is direct labor cost. Over the past year the company sold 45,000 skateboard, with the following operating results:

Sales (45,000 skateboard)                             $1,440,000

Variable expenses                                              1,008,000

Contribution margin                                              432,000

Fixed expenses                                                        288,000

Net operating income                                       $   144,000

Management anxious to maintain and perhaps even improve its present level of income form the skateboard.

Required:

1a. Compute the CM ratio and the break-even point in skateboards.

1b. Compute the degree of operating leverage at last year’s level of sales.

 

2. Due to an increase in labor rates, the company estimates that variable costs will increase by $1.60 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $32.00, what will be the new CM ratio and the new break-even point in skateboard?

3. Refer to the data in (2) above. If  the expected  change in variable  cost takes place, How many skateboard will have to be sold next year to earn the same net operating income, $144,000, as last year?

4. Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Product wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs?

 

5. Refer to the original data. The company is considering the construction of a new, automated plant. The new plant slash variable cost by 20% but it would cause fixed costs to increase by 80%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in skateboard?

 

6. Refer to the data in (5) above.

a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $144,000, as last year?

B1. Assume that the new plant is constructed and that next year the company manufactures and sells 45,000 skateboards (the same number as sold last year). Prepare a contribution format income statement.

 

B2. Compute the degree of operating leverage.

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