Question

Titan foods makes a high-energy forzen meal. the selling price per package is 7.20, and variable cost of production is 4.32. Total fixed cost per year is 569,880. the company is currently selling 225000 packages per year.

a. What is the margin of safety in packages?
b. What is the degree of operating leverage?
c. If the company can increase sales in packages by 30 percent, what percentage increase will it experience in income? Prove your answer using the income statement approach.
d. If the company increases advertising by $41,200, sales in packages will increase by 15 percent. What will be the new break-even point? The new degree of operating leverage?

Answer 1

a = 12%

b = 4.82%

c = 248%

d = 4.78%

Step-by-step explanation:

Calculating Break even point

Fixed cost / Sales price per unit - variable cost per unit = break even point

$569,880 / {$7.20-$4.32}

=$569,880 / $2.88

=$197,875 is the break even point.

a.

Margin of Safety

225,000 packages - $197,875 / 225,000 packages * 100

=12%

b.

Income is computed

Sales $1,620,000 {225,000 * $7.2}

Less: COGS $972,000 {225,000 * $4.32}

Less : Fixed Costs $569,880

Income = $78,120

Operating leverage is % change in Income / % change in sales

$78,120 / $1,620,000 * 100

= 4.82%

c. If sales increase by 30%

Sales $2,106,000 {225,000 * $7.2 * 130%}

Less: COGS $1,263,600 {225,000 * $4.32 * 130%}

Less : Fixed Costs $569,880

Income = $272,520

Increase in Income = $272,520 - $78,120 / $78,120 * 100

= 248%

d. Calculating Break even point

Fixed cost / Sales price per unit - variable cost per unit = break even point

$569,880 + $41,200 / {$7.20-$4.32}

= $212,180.56

Operating leverage is % change in Income / % change in sales

Calculating increase in income

Sales $1,863,000 {225,000 * $7.2 * 115%}

Less: COGS $1,117,800 {225,000 * $4.32 * 115%}

Less : Fixed Costs $611,080 {$569,880 + 41,200}

Income = $134,120

Increase in Income = $134,120 - $78,120 / $78,120 * 100

=71.68%

Operating leverage is % change in Income / % change in sales

71.68% / 15%

= 4.78%