Question

The following CVP income statements are available for Blanc Company and Noir Company.

Blanc Company Noir Company
Sales $450,000 $450,000
Variable costs 270,000 225,000
Contribution margin 180,000 225,000
Fixed costs 162,000 207,000
Net income $18,000 $18,000
1. Compute the break-even point in dollars for each company.
2. Compute margin of safety ratio for each company.
3. Compute the degree of operating leverage for each company.

Answer 1

Answer and Explanation:

The computation is shown below:

As we know that

Contribution Margin Ratio is

= contribution margin ÷sales

For Blanc Company

= 180000 ÷ 450000

= 0.40

For Noir Company

= 225000 ÷ 450000

= 0.50

a.

Break-even point = Fixed Costs ÷ Contribution Margin Ratio

For Blanc Company

= 162000 ÷ 0.40

= $405,000

For Noir Company

= $207000 ÷ 0.50

= $414000

2.

Margin of Safety Ratio = (Actual Sales - Break-even Sales) ÷ Actual Sales

For Blanc Company

= (450000 - 405000) ÷ 450000

= 10%

For Noir Company

= (450000 - 414000) ÷ 450000

= 8%

3.

Degree of Operating Leverage = Contribution Margin ÷ Net Income

For Blanc Company

= 180000 ÷ 18000

= 10

For Noir Company

= 225000 ÷ 18000

= 12.5