Tyrene Products manufactures recreational equipment. One of the company’s products, a

Problem 5-29 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales [LO1, LO3, LO4, LO5, LO6, LO8]

Tyrene Products manufactures recreational equipment. One of the company’s products, a skateboard, sells for $37.50. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $22.50 per skateboard of which 60% is direct labor cost.

Over the past year the company sold 40,000 skateboards, with the following operating results:

Sales (40,000 skateboards)	$	1,500,000
Variable expenses		900,000
Contribution margin		600,000
Fixed expenses		480,000
Net operating income	$	120,000

Management is anxious to maintain and perhaps even improve its present level of income from the skateboards.

Required:

1a.	Compute the CM ratio and the break-even point in skateboards. (Omit the "%" sign in your response.)

Contribution margin	40	%
Unit sales to break even	32,000	skateboards

1b.	Compute the degree of operating leverage at last year's level of sales.

Degree of operating leverage

5

2.

Due to an increase in labor rates, the company estimates that variable costs will increase by $3 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $37.50, what will be the new CM ratio and the new break-even point in skateboards? (Omit the "%" sign in your response.)

Contribution margin	32	%
Unit sales to break even	40,000	skateboards

3.	Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year?

Number of skateboards

50,000

4.

Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Selling price

$ 42.50

5.

Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 90%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in skateboards? (Omit the "%" sign in your response.)

Contribution margin	64	%
Unit sales to break even	38,000	skateboards

6.	Refer to the data in (5) above.

a.	If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year?

Number of skateboards

n/r

b-1.

Assume that the new plant is constructed and that next year the company manufactures and sells 40,000 skateboards (the same number as sold last year). Prepare a contribution format income statement. (Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)

Contribution Income Statement.
Sales	$ 1,500,000
Variable expenses	540,000
Contribution margin	960,000
Fixed expenses	912,000
Net operating income (loss)	$ 48,000

b-2.	Compute the degree of operating leverage

Degree of operating leverage

20