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pentagon [3]
2 years ago
14

Gabe industries sells two products, basic models and deluxe models. Basic models sell for $44 per unit with variable costs of $2

5 per unit. Deluxe models sell for $25 per unit. Deluxe models sell for $54 per unit with variable costs of $25 per unit. Total fixed costs for the company are 1,441. Gabe Industries typically sells three Basic models for every Deluxe model. What is the breakeven point for Basic models and Deluxe models?
a. 26 units of Basic, 38 units of Deluxe
b. 17 units of Basic, 51 units of Deluxe
c. 38 units of Basic, 26 units of Deluxe
d. 51 units of Basic, 17 units of Deluxe
Business
1 answer:
Dima020 [189]2 years ago
6 0

Answer:

See below

Explanation:

Basic models Deluxe models

Sales price $44 $54

Variable costs $25 $25

Contribution margin $9 $29

×

Sales mix 1 3

Total contribution margin $9 $87

Contribution margin per unit = $9 + $87 = $96

Weighted contribution margin= Total contribution margin / Units

= $96 / $4

= $24

Break even point = Total fixed costs / Weighted contribution margin

Break even point = $1,441 / $24

Break even point = 60 units

•Basic units = 60 × 63.33% = 38 units of basic

•Deluxe units = 60 × 43.33% = 26 units of Deluxe units

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Answer:

1-a. Total Contribution margin is $210,000 and Net operating income is $28,000.

1-b. Degree of Operating Leverage = 7.50

2-a. The expected percentage increase in net operating income for next year is 150%.

2-b. Expected amount of Net Operating Income is $70,000.

Explanation:

Note: This question is not complete. The complete question is therefore provided before answering the question as follows:

Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $6 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of payments to this contractor.

Required:

1-a. Prepare a contribution format income statement for the game last year.

1-b. Compute the degree of operating leverage.

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a. What is the expected percentage increase in net operating income for next year?

b. What is the expected amount of net operating income for next year? (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)

Explanation of the answer is now provided as follows:

1-a. Prepare a contribution format income statement for the game last year.

The contribution format income statement for the game last year can be prepared as follows:

Magic Realm, Inc.

Contribution Income Statement

For Last Year

<u>Details                               Total ($)       Per Unit ($)   </u>

Sales                                 300,000              20

Variable cost                <u>    (90,000)   </u>          <u>  (6) </u>

Contribution margin         210,000               14

Fixed expense                <u> (182,000) </u>

Net operating income   <u>   28,000  </u>

1-b. Compute the degree of operating leverage.

Degree of Operating Leverage = Contribution Margin / Operating Income = $210,000 / $28,000 = 7.50

2-a. Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year). Given this assumption: What is the expected percentage increase in net operating income for next year?

Since:

Degree of Operating Leverage = Percentage change in Operating Income / Percentage change in Sales

Substituting the relevant values, we have:

7.50 =  Percentage change in Operating Income / 20%

Percentage change in Operating Income = 7.5 * 20% = 150%

Therefore, the expected percentage increase in net operating income for next year is 150%.

2-b. Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year). Given this assumption: What is the expected amount of net operating income for next year? (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)

This can be calculated as follows:

Change in Net Operating Income = 150% * $28,000 = $42,000

Expected amount of Net Operating Income = Current Net Operating Income + Change in Net Operating Income = $28,000 + $42,000 = $70,000

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Learn more about the lifetime value in the related link:

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