Warm

Selling price per pair $ 10 $

Variable expenses per pair $ 2.5 $
Number of pairs sold monthly 2,100 units

Sales 21,000.00
Variables 5,250.00 25.00%
Contribution Margin
Fixed Expenses
Operating Income
CM Unit 7.50
Sales % 66.67%

Break-even (units) = (Fixed Expenses)

CM/unit

Break-even ($) = (Fixed Expenses)

CM %

Margin of safety ($) = Total sales - BE ($)

Margin of safety (%) = Margin of safety ($)
Total sales

BEP in units = Fixed cost/weighted average contribution 336.00

Margin of safety ($) = Total sales - BE ($) 31,164.00

Margin of safety in units = Total Units - BEP in Units 2,464.00
Margin of safety in % = MOF Units / Total Units 88.00%

Warm
Selling price per pair $ 10 $
Variable expenses per pair $ 2.5 $
Number of pairs sold monthly 2,100 units

Sales 21,000.00 100.00%

Variables 5,250.00 25.00%
Contribution Margin 15,750.00
Fixed Expenses
Operating Income
CM Unit 7.50
Sales % 44.12%
Break-even ($) = (Fixed Expenses)
CM %

Margin of safety ($) = Total sales - BE ($) 42,647.40

Margin of safety (%) = Margin of safety ($)

Total sales

Sales (16,000 units) $ 384,000

Variable expenses 192,000
Contribution margin 192,000
Fixed expenses 170,000
Operating income $ 22,000

CM ratio 50.00%

Break-even ($) = (Fixed Expenses)

CM %

25,000.00

Degree of operating leverage = Contribution Margin$ / Operationg Income

8.73 8.73

122.22% 122.22%
48,888.40
26,888.40

5. The sales manager is convinced that a 10% reduction in the

selling price, combined with a $30,000 increase in advertising,
would increase this year's unit sales by 25%.

a. If the sales manager is right, what would be this year's net

operating income if his ideas are implemented?

b. Do you recommend implementing the sales manager's

suggestions?
 16000
Old new
convinced that a 10% reduction in the selling price 10%
$28,000 increase in advertising 28000
increase this year's unit sales by 30%. 30% 20800
Selling Price 24 21.60
variable 12

The president does not want to change the selling price. Instead, he
wants to increase the sales commission by $1 per unit. He thinks
that this move, combined with some increase in advertising, would
increase this year's unit sales by 30%. How much could the
president increase this year's advertising expense and still earn the
same $22,000 operating income as last year?
Selling Price 24
Commission 1
Units %30 20800
Operating Income 22000
Variable 12

Selling Price 20
Commission 1
Units %30 22500
Operating Income 36000
Variable 8
 Sales %
Cozy Warm 2100 75.00%
15 Cozy 700 25.00%
7.5 Total 2800
700 units

Total
10,500.00 31,500.00 1
5,250.00 50.00% 10,500.00 33.33%
21,000.00 66.67%
2520
18,480.00
7.50
33.33%

3780

27,720.00
88.00%

3.00 2.25 1800 600

3.00 0.75 2200
2,464.00
78.57%

Cozy Toasty
15 $ 23
7.5 $ 18.4
700 units 700 units
Total
10,500.00 100.00% 16,100.00 100.00% 47,600.00 1.00
5,250.00 50.00% 12,880.00 80.00% 23,380.00 49.12%
5,250.00 3,220.00 24,220.00
2,520.00
21,700.00
7.50 4.60
22.06% 33.82%
4952.60

89.59%

360,000
144,000
216,000
180,000
36,000

60.00%

340,000 300,000

33000

6.00

132.00%
83,520.00
47,520.00

Sell 20.00 18.00

 Var 8.00
Units 20,000.00 25,000.00

Sales 449,280 Sales 450,000.00 360,000

variable 249,600 Var 200,000.00 144,000
CM 199,680 CM 250,000.00 216,000
Fixed 198,000 Fixed 210,000.00 180,000
Net Op. Inc. 1,680 Margin Op 40,000.00 36,000

18,000.00 Unit 18,000.00

Sell. Pr 20

Var 8
Sales 499,200.00 Fixed 180,000.00
Variable 249,600.00
CM 249,600.00
Fixed 190,800.00
Net Opr. In. 58,800.00
- 22,000.00
Advert 36,800.00

Sales 450,000.00
Variable 180,000.00
CM 270,000.00
Fixed 202,500.00
Net Opr. In. 67,500.00
- 36,000.00
Advert 31,500.00
New Values
414,000.00 449,280
180,000.00 249,600
234,000.00 199,680
208,000.00 198,000
26,000.00 1,680
- 10,000.00 - 20,320

8% reduction price
Fixed Cost 28000 increase
Sales Increase %25
 CM Units CM/Unit % over Sales
Warm 22500 3000 0.75 7.5 0.75 5.625
Cozy 7500 1000 0.25 7.5 0.25 1.875
30000 4000 7.5
7.5