Q5TI - Horngren'S Financial And Managerial Accounting

Question

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Expected sales are 200 tables per month. 

17. Calculate the margin of safety in units. 

18. Determine the degree of operating leverage. Use expected sales. 

19. The company begins manufacturing wood chairs to match the tables. Chairs sell for \)50 each and have variable costs of \(30. The new production process increases fixed costs to \)7,000 per month. The expected sales mix is one table for every four chairs. Calculate the breakeven point in units for each product.

Step-by-Step Solution

Answer

17. Margin of safety in units = 100 Units

18. Degree of operating leverage = 0.01

19. Breakeven point of tables is 100 units and chairs is 350 units

Calculation of margin of safety in units

Break-even Points = Total Fixed Cost/ Contribution Per Unit

=$6,000/$100-$40

=$6,000/$60

=100

 

Expected sales − Breakeven sales = Margin of safety in units

=200– 100

= 100 Units

Calculation of degree of operating leverage

Degree of operating leverage = Contribution margin/Operating income

                                             =($100-$40)/$6,000

=$60/$6,000

=0.01

Calculation of breakeven point in units

Required sales in units (table) = Fixed costs / Contribution margin per unit 

=$6,000/($100-$40)

= 100Units

Required sales in units (Chair) = Fixed costs / Contribution margin per unit 

=$7,000/($50-$30)

= 350 Units