Question

Sales price per unit:(current monthly sales volume is 120,000 units). . . . $25.00

Variable costs per unit:
Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6.60
Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.00
Variable manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.40
Variable selling and administrative expenses. . . . . . . . . . . . . . . . . . . . . . . . . $1.90
Monthly fixed expenses:
Fixed manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $241,900
Fixed selling and administrative expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . $327,900

Required:
a. What is the company's contribution margin per unit?
b. What would the company's monthly operating income be if the company sold 150,000 units?
c. What is the company's current operating leverage factor (round to two decimals)?

Answer 1

Results are below.

Step-by-step explanation:

The contribution margin is the result of deducting from the selling price the total unitary variable cost:

Unitary contribution margin= 25 - 6.6 - 7 - 2.4 - 1.9

Unitary contribution margin= $7.1

Now, we can calculate the net income when 150,000 units are sold:

Net income= total contribution margin - total fixed expense

Net income= 150,000*7.1 - 241,900 - 327,900

Net income= $495,200

Finally, the operating leverage factor

Operating leverage factor= Total contribution margin / operating income

Operating leverage factor= 1,065,000 / 495,200

Operating leverage factor= 2.15

If sales increase by 10%, then operating income will increase by 21.5% (10*2.15).